Chicago’s 2023 mayoral election is over, but the negative impact on the luxury real estate market is just beginning.
10-Apr-23 – Mayor-elect Brandon Johnson’s proposal to more than triple the transfer tax – imposed on buyers of residential or commercial properties priced at $1 million or more – is not being well received by the Gold Coast, Lakeview, Lincoln Park, Old Town, and Streeterville real estate brokerage communities that strongly backed election competitor Paul Vallas.
Dubbed the “Mansion Tax,” the Johnson proposal would hike the buyer’s transfer tax on a $1 million property to 2.65 percent – or a hefty $26,500 – from the current $7,500, which is .075 percent of the sale price. The tax would translate into buyers of million-dollar-plus properties having to pay $13.25 for every $500 in sales value, up from the current $3.75 in value.
The $3,000 transfer tax that sellers now pay per $1 million would not change under the current proposal.
Under Johnson’s “Bring Chicago Home” proposal, 100 percent of the additional buyer taxes reportedly would be earmarked for the fight against homelessness.
The buyer’s tax bite would grow incrementally with the sale price of the home. For example, if the sale price was $1.5 million, the transfer tax would jump to $39,750 from the current $11,250. The buyer of a $2 million mansion would pay a whopping $53,000, up from the current $15,000.
The Mansion Tax would have to be approved both by the Chicago City Council and the Illinois General Assembly. If approved, the earliest it would go into effect is this fall, experts say.
In addition to the threat of a possible luxury tax looming over the market, values of million-dollar-plus properties already have dropped 10 to 30 percent, according to Jim Kinney, former president of Illinois REALTORS and a veteran Gold Coast broker for Baird & Warner.
Prices already are falling because of soaring mortgage interest rates and looming tax increases. In the past 12 months, 2,391 Chicago homes sold for $1 million or more, reports Midwest Real Estate Data. That’s down 14.5 percent from the previous 12 months.
A seller of a two-bedroom condominium at the plush Ambassador West in the Gold Coast recently cut the asking price $625,000 from $1.875 million to $1.25 million, Kinney noted.
Experts estimate that in only 12 months, the new tax could generate $158.5 million in new taxes. That’s on top of the roughly $62.6 million in annual transfer taxes million-dollar-plus sales actually pumped into city coffers under the existing tax structure in the past year.
“If luxury property values keep dropping, soon there will be no $1 million properties being sold, so the Mansion Tax threshold may have to be lowered,” Kinney surmised.
Kinney believes buyers will ask: What does the Mansion Tax do to my choices? A buyer either pays the tax in the city or moves to a North Shore suburb where there is no Mansion Tax and the schools are infinitely better.
“High taxes and crime already are causing people to vote with their feet. Some 60,000 people have left Illinois in recent years,” Kinney said.
If the City Council passes the Mansion Tax proposed by Mayor-elect Johnson, 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.
As of January 2023, a recent count of the homeless in Chicago showed the number actually declined to 3,875 people over the past two years. However, up to 1,278 homeless people are still living in streets and parks and under viaducts.
Is rent control coming to Chicago?
Kinney also believes the next Chicago housing crisis will come in the ongoing battle over rent control between progressives and conservatives in the Illinois General Assembly.
“Rental inventory will decline under rent control,” Kinney predicted. “There will be more live-in landlords and fewer investors.”
If landlords are not allowed to pass along increased costs because of rent control, there likely will be an economic dark side, experts say. Landlords eventually could cut back on maintaining their buildings – causing deterioration, followed by lower rents to fill vacancies and higher evictions for low-credit, non-paying tenants.
Higher rents ultimately are the result of decisions made by county tax assessors, taxing bodies, utility companies, and legislators.