The Upcoming Chicago “Mansion Tax” Referendum: What You Need to Know
Much has been made in the news recently about the proposed “Mansion Tax” referendum that will be on the primary ballot for Chicago voters in March of 2024. But for the average person to understand what this proposed tax actually is, it is important to understand how Chicago properties are currently taxed.
First of all, the proposed “Mansion Tax” does not refer to real estate taxes or income taxes. The “Mansion Tax” is all about transfer taxes. Unlike income tax, which is due every year, or real estate taxes, which are due twice a year, we don’t hear a lot about transfer taxes in the news. Why is that? It’s because transfer taxes are only due when real estate is bought or sold. If you bought your house 10 years ago, you paid the tax then. You won’t be paying anything again until you sell.
Unless the property is exempt (which is outside the scope of this discussion), everyone who buys property in Chicago pays transfer tax. Until a number of years ago, the transfer tax was paid exclusively by the purchaser. It was $7.50 for every $1000 of the purchase price. That means that if the purchaser bought real estate for $100,000, the purchaser paid the transfer tax in the amount of $750 to the city at closing. I like to call this the “Welcome to Chicago“ tax.
At some point after the economy crashed around 2007 or 2008, the city revised how they charged transfer taxes. Basically, nothing changed on the buyer’s side. Just like before, the Buyer paid $7.50 for every $1,000 of the purchase price. However, there was now a new transfer tax on the seller’s side. This was a way for the city to increase revenue during the recession. The seller’s tax was $3.00 for every $1,000 of the purchase price. That means that for the sale of $100,000 in real estate, the seller was paying $300 in taxes. The city was now collecting $10.50 for every $1,000 of real estate sold. Excluding exempt properties, this transfer tax applied to every parcel of real estate sold in Chicago, no matter what type of real estate it was or how much it cost. The application of the transfer tax was uniform across residential property, commercial property, and multi-use property. Nothing much has changed in the interim years.
With the upcoming “Mansion Tax” referendum, the city is basically proposing a new method of calculating Chicago transfer taxes based on the purchase price only. Here’s what the proposal comes down to:
1. For properties sold for under $1 million, the transfer tax on the purchaser side would decrease from $7.50 for every $1000 of the purchase price to $6.00 for every $1000 of the purchase price. This amounts to a 20% decrease.
2. For any portion of the sales price between $1 million and $1,500,000, the purchaser’s portion of the transfer tax would be $20 for every $1,000 of the sales price.
3. For any portion of the sales price above $1,500,000, the purchaser’s portion of the transfer tax would be $30 for every $1000 of the sales price.
Note there is no proposal to change the seller-side transfer tax. That would remain at $3.00 per $1,000 of the sales price.
Let’s look at some examples to see how much the city would collect from the purchaser under the current rules versus under the proposed referendum:
a. For a $500,000 house, currently the city collects $3750 from the purchaser. If the referendum is passed, this number would decrease to $3000.
b. For a $1,250,000 house, currently the city collects $9375 from the purchaser. If the referendum is passed, this number would increase to $11,000.
c. For a $1,800,000 house, currently the city collects $13,500 from the purchaser. If the referendum is passed, this number would increase to $26,000.
So should this referendum be passed? Wouldn’t it be great if we had a magic ball that could answer that question? What would serve the greater good? I don’t know the answer to that question, but I do think there are some things to think about before you vote.
First of all, the city states they will use the increase in funds that they collect to combat homelessness. The city believes it will significantly increase its revenue by changing the transfer tax structure. They will thus have a great deal more funding to assist the homeless and provide related services. Presumably the city will have some mechanisms in place for the use and monitoring of the additional revenue they anticipate. There are organizations that are against the referendum that do not believe the city’s revenue will increase as much as they have projected.
The vast majority of people who are buying and selling homes or other real estate do buy and sell under $1 million. To that end, their transfer tax would decrease and buyers would save money at their closings. Any savings in closing costs is always welcomed by the parties.
While it may be known as the “Mansion Tax”, the tax does not only affect mansions. It affects expensive commercial real estate — office buildings, warehouses, retail stores, restaurants, hotels, gas stations, shopping centers, theaters and much, much more. While many large commercial properties are owned by large companies who want a presence in the city of Chicago, others are owned by investors or groups of investors who are not particularly interested in a glitzy address and could easily take their money elsewhere.
The impact against commercial properties, especially properties over $1,500,000, could be very negative. I have clients who won’t buy commercial properties in Cook County, much less in Chicago, simply because of the real estate tax burden. Having to shell out so much for transfer taxes on top of high commercial real estate taxes could further negatively impact the commercial market in Chicago. There is so much commercial vacancy already in the city; a large transfer tax certainly isn’t going to help reduce vacancy.
As you can see, there are pros and cons to the proposed referendum, and there is a lot to think about. If you will be voting in the Chicago primary next month, please educate yourself on this topic before you vote!