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Controversial ‘Mansion Tax’ Could Backfire, Experts Say

“Chicago’s transfer tax increase will impact your property; your alderperson wants to hear from you.” Chicago’s City Council is “considering an increase to the real estate transfer tax for properties valued over $1 million,” the VoterVoice text announcement continued.


“This will impact your property. It also will make it more expensive for groceries, health care facilities, and small businesses to open in our neighborhoods.”


That terse demand – obviously written and orchestrated by Chicago’s real estate industry – popped up as a text on this writer’s mobile phone last week.


Dubbed the “Mansion Tax,” the newly-revised proposal created by Mayor Brandon Johnson would hike the buyer’s transfer tax on properties valued between $1 million and $1.5 million to 2 percent – or the hefty $20,000 to $30,000 range. That’s a 167 percent increase.






(Left) Lounge with bar on second level of 1932 North Burling Street. Photo by Ryan and Sarah Miller.






The current Chicago transfer tax calls for the buyer to pay a flat 0.75 percent, or $7.50 per $1,000 of the sales price. Sellers pay $3 per $1,000 of the property’s value, along with $1.50 per $1,000 to the State of Illinois, and 50 cents per $1,000 to Cook County.


Under the new proposal, buyers of properties valued at more than $1.5 million would pay a transfer tax of 3 percent – an over-the-moon quadrupling of the fee. So, if the property were valued at $2 million, the tax would be a whopping $60,000.


However, the new proposal, designed to appeal to the city’s bungalow belt, would cut the transfer tax for properties valued at under $1 million to 0.60 percent. If a home was valued at $500,000, the buyer’s transfer tax would only be $3,000.


Under Mayor Johnson’s “Bring Chicago Home” proposal, 100 percent of an estimated $163 million in additional buyer taxes reportedly would be earmarked over 12 months for the fight against homelessness.


That’s on top of the roughly $62.6 million in transfer taxes on million-dollar-plus sales collected last year by the city under the existing tax structure.


“The proposed real estate transfer tax will jeopardize investment in the city, increasing transaction costs, decreasing funds available for renovations, reducing return on investment, and will lead to apartment developers to do business elsewhere,” said Michael Mini, Executive Vice President of the Chicagoland Apartment Association.


Real estate experts predict that downtown commercial office buildings, some of which currently are 50 percent vacant, will drop in assessed value. Chicago office properties now have the highest vacancy rate in 75 years – enough space to fill 16 Willis Towers.


Here are facts offered on the impact of the proposed new transfer tax on commercial properties from Chicagoland Chamber of Commerce, Building Owners and Managers Association of Chicago, and Chicagoland Associated General Contractors:


• Downtown office buildings could lose up to 50 percent of their market value.


• In 2022, downtown office buildings paid more than $1 billion in property taxes.


• More than $500 million in property tax burden could be shifted to homeowners and owners of small apartment buildings and force a residential property tax hike ranging from 10 to 20 percent. On a typical $250,000 bungalow this would mean a tax bill increase of $450 to $900.


• The new transfer tax also will put upward pressure on apartment rents, which already are up 6.4 percent on new leases this year.


Alternative to tax could be funded by developers and gaming revenue


“The backers of the transfer tax hike appeal are unconcerned about the downtown office tower owners who are already grappling with a staggering market,” noted Paul Vallas, former mayoral candidate and now an advisor for the Illinois Policy Institute. “Commercial property sales have plummeted 51 percent in the first half of 2023.”


Vallas noted that Chicago already has the second-highest commercial property tax in the nation, and downtown office vacancies have escalated to 22.6 percent.


According to Kroll Bonding Rating Agency, Chicago tops a nationwide list for troubled office building loans at 22.7 percent.


Vallas proposed an alternative to increasing the proposed Mansion Tax, which he believes is at the top of Chicago’s Democratic Socialist agenda:


“Create a City Housing Trust funded annually with a share of developer fees, a share of the city’s annual Tax Increment Financing surplus, housing-related fees and fines, and potential revenue from the legalization of gaming,” suggests Vallas.


The Mansion Tax really is a Robin Hood-style plan to steal from the rich to give to the poor, some say. However, it could also hurt the city’s middle-class property owners. But the truth in that famous fable is that Robin Hood did not rob the rich, he took money from the king and his tax collectors, and returned the money to those who earned it. Property owners would be OK with that scenario.


Mayor Johnson’s proposed transfer tax hike could eventually backfire to actually reduce the city’s affordable housing stock, especially if the tax is not adjusted for inflation.


Thousands of North Side two-unit, three-unit, and four-unit apartment buildings are owned by “Ma and Pa” middle-class people and senior citizens, who frequently charge under-market affordable rents.


While a growing number of those properties may be valued at more than $1 million, the buildings really represent the middle-class owner’s retirement nest egg. And with appreciation and inflation, over time, more properties will grow to slip above $1 million in value.


Although the biggest chunk of the proposed tax would be paid by the buyer, it could lower the seller’s net sales price by tens of thousands of dollars.


Illinois REALTORS, a trade association that represents agents across the state, believes that the luxury tax would further lower prices and reduce sales volume, especially in lakefront neighborhoods such as Edgewater, Gold Coast, Lakeview, Lincoln Park, Near North Side, and Old Town.








“The proposed Mansion Tax violates the principal of uniformity,” noted Gold Coast Realtor Sara Benson (right), president of Benson Stanley Realty. “It creates separate classes of real estate ownership, and that concept likely will be tested in the courts.”







Mayor Johnson’s team has signaled it no longer will seek to enact its luxury tax proposal as a state law through the Illinois General Assembly. Instead, his goal is for the luxury tax to be approved by the Chicago City Council this fall.


Then, in 2024, the proposal would be placed on the ballot for a voter referendum on the March Presidential Primary ballot. So, the earliest the luxury tax could go into effect is spring of 2024.


If the City Council passes the Mansion Tax proposal, and it is approved via referendum next spring, experts say Cook County Assessor Fritz Kaegi may have to institute a new model for assessing million-dollar-plus homes to compensate for falling market values and the hefty burden of the added layer of taxes.


The U.S. Department of Housing and Urban Development estimates Chicago’s homeless population at about 5,300. Obviously, this does not include the 14,000 asylum-seekers shipped to Chicago from Texas and other places. Some 2,000 now are living temporarily in Chicago police stations and may soon be housed in proposed “Base Camp” tent communities across the city.




Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.

Comments


“The book is Escaping Condo Jail by Sara Benson and Don DeBat. I would say that anybody thinking about buying a condo, or even anybody serving on a condo board, or anybody who has any connection to a condo, this is must reading—all 600 and something pages. Thanks a lot for a great book!”

 

Steve Sanders, “Your Money Matters” WGN TV, December 22, 2014

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