Do you remember when buying a house for a million dollars really meant you were buying a mansion? Probably not. But there was a time when the “mansion tax” really meant what it was called. Now it’s just a cruel joke repeated at the closing table when buyers write out checks for 1% of the purchase price on a house, condo or coop of $1,000,000 or more.

An even crueler joke occurs when a buyer thinks they are exempt from the mansion tax but has unwittingly veered off into mansion tax land due to some interesting twists in the tax law. Real estate transactions are subject to audit for payment of this tax, so be careful. Here are two situations to look out for:

Buyer paid transfer taxes: It’s quite common for purchasers to agree to pay transfer taxes on sponsor deals, whether new construction or conversion. As market forces changed, this practice did too, with sponsors agreeing to waive this tradition when the market softened and buyers gained more control in negotiations. Sometimes, however, instead of agreeing to pay the transfer tax themselves, sponsors give a closing cost credit equal to the amount of the transfer tax to be paid by the purchaser, giving the same economic effect to the transaction. But be careful. If a contract is written at $985,000, for example, and the buyer agrees to pay the sponsor’s transfer tax at closing, this deal will also trigger a mansion tax payment. This is because the tax code requires the additional tax (as the mansion tax is technically known in the code) to be paid on the total consideration given, which not only includes the purchase price but also any other consideration given in connection with the purchase including the payment of the seller’s transfer taxes. In this case, even if the sponsor agreed to a credit to cover the transfer taxes, the payment of the taxes would bump up the total consideration of the deal to over $1,000,000 (to be exact, $985,000 + $3,940 NYS transfer tax + $14,036.25 NYC transfer tax, or $1,003,976.25). So in this case the buyer would be required to pay an additional tax of $10,040 because the total consideration is $1,000,000 or more! And recently, the tax department has begun to consider other buyer paid costs like seller attorney fees as additional consideration. Be sure to check carefully when deals are approaching $1,000,000 to ensure that they are not going to inadvertently subject the buyer to the mansion tax.

Mixed-Use buildings: If a building has 3 or fewer units of residential component, then it is subject to the mansion tax if the total purchase price is $1,000,000 or more. This is the case even if the building is largely commercial. Here is how to determine the tax. First allocate the portion of the building that is residential. This can be done using square footage, or floor ratios. For example, if a 4 unit building has 1 residential, and 3 commercial, then the residential allocation would be 25%. Suppose the purchase price is $2,000,000. The mansion tax would then be $500,000, or 25% of the total price. The rule applies on any transaction of $1,000,000 or more that has any residential component. Be careful here, this is a widely unknown rule.