Chicago mayor Brandon Johnson recently agreed to change the city’s real estate transfer tax by implementing a so-called “mansion tax”– a real estate transfer tax applied to the purchase of property over a certain amount. The goal of the tax is to provide funds to build affordable housing for Chicago’s unhoused, although achieving this goal simultaneously presents additional obstacles.
While several states, counties, and municipalities have enacted similar real estate transfer taxes, Chicago’s proposed “mansion tax” structure is unique in two notable ways.
1. Chicago’s “mansion tax” would be paid by buyers of residential and commercial properties.
Despite its characterization as a “mansion tax,” Chicago’s new real estate transfer tax applies to both residential and commercial properties. Commercial real estate experts fear that the tax could have a chilling effect at a time when that market is already struggling. According to Crain’s Chicago Business, in the first half of 2023, commercial property transactions totaled just under $5.3 billion – a 51% decrease from the same period last year. This could be particularly detrimental to the development of multi-family properties. The tax hike could make buyers less interested in purchasing property in Chicago, and developers less interested in building. If commercial real estate developers are discouraged from building in Chicago, achieving a proper supply of affordable housing could be challenging.
Industry experts also criticize the imposition of the tax on buyers, rather than sellers, of real estate.
2. Chicago’s new transfer tax has a graduated approach.
Currently, all buyers in Chicago pay the same transfer tax at closing equal to 0.75% of the purchase price. The new transfer tax has a graduated approach, which also differs from Brandon Johnson’s original plan during his campaign which would have increased the transfer tax to 2.65% for all transactions over $1 million. The final law applies three tiers for the transfer tax:
- Property sales less than $1 million: transfer tax would be lowered to 0.60%.
- Property sales between $1-1.5 million: the tax would be increased to 2.0%.
- Property sales over $1.5 million: the tax would be increased to 3.0% (which is quadruple the current rate).
Chicago would have one of the highest “mansion taxes” in the country. In comparison, Los Angeles recently enacted a 4% transfer tax on properties that sell for over $5 million and 5.5% on properties that sell for over $10 million (note: Los Angeles County’s “mansion tax” similarly applies to commercial properties). Connecticut imposes a tax of 2.25% on properties that sell for over $2.5 million. And in New Jersey, the transfer tax is 1% on properties sold for over $1 million.
Crain’s Chicago Business reports that proponents of the draft tax plan are expected to introduce a resolution authorizing the ballot referendum at Chicago’s City Council meeting on September 13. If the referendum is approved, the new ordinance would then need to be approved, likely in Spring 2024.