What Mansion Tax Proponents Don’t Want You To Know

The city is pitching its new “Mansion Tax” as a tax on wealthy homebuyers, but it’s likely to cost the average Chicago homeowner thousands in increased property taxes.

On March 19, Chicagoans will vote on a ballot measure to change the structure of the city’s real estate transfer tax. @properties Christie’s International Real Estate opposes this measure, and as the vote draws near, we want to explain our position, so voters can make an informed decision at the ballot box.

This is the first of two posts on the topic, and this one deals specifically with how the proposed transfer tax will impact property taxes for Chicago homeowners. But first, here’s some background.

What Are Transfer Taxes?

Every property owner in Chicago pays transfer taxes when they buy real estate, whether they’re buying a home, an apartment building, a restaurant or an office building. The current transfer tax rate is 0.75%. So, today someone buying a $500,000 home pays the city $3,750; a landlord buying a six-flat for $1 million pays $7,500; and an investor buying a $50 million office building pays $375,000 in transfer taxes.

When Mayor Johnson took office, one of his first initiatives was to propose an increase to the transfer tax to fund affordable housing and homelessness relief programs. The proposal calls for a graduated structure that raises the tax rate on transactions over $1 million from 0.75% to 2% and raises the rate on transactions over $1.5 million to 3%. The new structure would also lower the rate for transactions under $1 million from 0.75% to 0.6%. The mayor’s office claims the program will generate $100 million per year in additional revenue.

What’s In A Name?

Formally dubbed Bring Chicago Home, the measure is more commonly known as the “Mansion Tax,” and that wording is very important. After all, who owns mansions? Millionaires. And what’s the big deal if those millionaires have to pay a few extra bucks to buy a mansion? Except the “Mansion Tax” isn’t exclusively – or even primarily – a tax on mansions. Remember that it’s a tax on any real estate transaction over $1 million. And in Chicago, 9 out of 10 such transactions are for commercial real estate. So, why is it called a Mansion Tax?

To understand that question, one can look to the city of Los Angeles, which last year enacted their own version of Bring Chicago Home known as Measure ULA. According to a recent Chicago Tribune article, even though Measure ULA also applies to residential and commercial sales, backers of the measure purposely labeled it a “Mansion Tax” to build voter support.

“It was marketed as a mansion tax, and that’s what made it easy for voters to get behind,” one LA city councilwoman told the Tribune.

The former director for the Chicago Coalition for the Homeless said, “We did go to LA, and we modeled our campaign on them.”

“OK,” you might say, “but what difference does it make…residential vs. commercial? After all, a lower rate on properties under $1 million means most homeowners would get a break.” And you’d be right, except for one major issue: property taxes.

The Property Tax Problem

In Chicago, the total amount of property tax collected each year corresponds to the assessed value of all property, commercial and residential. If commercial properties decline in assessed value, then they generate less property tax, and residential properties must make up the difference.

Unfortunately, commercial property values are in the midst of their biggest slump since the Great Recession. In fact, a study for Crain’s Chicago Business by the Mansueto Institute for Urban Innovation and the Center for Municipal Finance at the University of Chicago estimates that the average Chicago homeowner will see their property taxes increase by $480 per year if the assessed value of downtown office buildings declines by 40%. Another study by Boston Consulting Group already pegs the decline of those office buildings in that range.

Examples of commercial real estate distress aren’t hard to find:

  • Last year, a West Loop office building sold at an 89% discount to its 2012 sales price.
  • A River North loft office building sold for 61% of its 2017 price.
  • The famous Stone Container building on Michigan Avenue sold for 40% of its 2017 price.
  • In 2022, the owner of Water Tower Place handed the keys back to their lender.

And the new higher transfer tax will negatively impact commercial real estate values even more.

Remember that 9 out of 10 properties that sell for $1 million-plus in Chicago are commercial. If the buyers of those properties must pay thousands, tens of thousands, or even millions more in transfer taxes, you can be sure the value of those buildings will be reduced by a similar amount. Lower sales prices = lower assessed values = lower property taxes on commercial real estate. And as we know, homeowners must make up the difference.

Saving Hundreds Will Cost You Thousands

Furthermore, property taxes are paid every single year. A transfer tax is paid only when you buy a home…once every 12 years on average. So, homebuyers below the million-dollar mark, who think they’re saving a few hundred bucks because their rate was lowered from 0.75% to 0.6%, will actually be paying thousands of dollars in additional property taxes over the time they own their home.

The property tax issue is complex, so we wanted to dedicate a full post to it. But there are many more reasons why we believe Bring Chicago Home is bad policy:

  • It’s going to force increased rents on those who can least afford it.
  • It’s going to discourage investment in Chicago, from downtown to the neighborhoods.
  • And, as has been the case in LA, it is highly unlikely that the program will generate anywhere near the revenue its backers promise.

We’ll get into these issues next time.

Finally, we believe that creating affordable housing and providing services to Chicago’s unhoused population are incredibly vital issues – so much so that for many years @properties Christie’s International Real Estate and our non-profit foundation, @gives back, have donated hundreds of thousands of dollars and countless volunteer hours to Habitat for Humanity and other housing-related organizations. To address the housing challenges facing our city, we encourage the mayor’s office and the Chicago City Council to look for alternative solutions that leverage public funds as well as private-sector contributions like those from @gives back.

Written by @properties
@properties Christie’s International Real Estate is Chicagoland’s #1 brokerage. Through our affiliation with Christie’s International Real Estate, our network spans nearly 50 countries. No matter your real estate needs, we’ve got you covered.