top of page

Balancing Act: Will Massachusetts' Real Estate Tax Benefit or Burden Investors?

Updated: 3 days ago

Massachusetts is considering implementing a transfer tax to boost funding for affordable housing, but this controversial fee could negatively impact the state’s already expensive real estate market.

 

State officials claim the proposed transfer tax could generate billions for state-funded affordable housing projects, potentially easing the housing crisis. However, real estate experts warn that such a tax might reduce home sales and exacerbate challenges for commercial real estate developers, who are already dealing with high office vacancy rates.

 

What’s in the Bill?

Governor Maura Healey’s $4 billion housing bond bill includes the transfer tax. Introduced in the fall, the bill has gained support from numerous municipal leaders. If enacted, it would allow cities to impose a 0.5% to 2% fee on property sales over $1 million.

 

Proponents, including Boston Mayor Michelle Wu, argue that the tax would help address the state’s affordable housing shortage. Massachusetts Secretary of Housing Edward Augustus stated that the state needs 200,000 more homes to meet population growth demands.

 

“This policy benefits local governments and, most importantly, renters and homeowners who have been priced out,” Augustus said.

 

State officials estimate that a 2% transfer fee could have generated $784 million in fiscal year 2022, with over half from commercial real estate sales.

 

Why the Real Estate Industry Opposes the Transfer Tax

Critics doubt the effectiveness of the transfer tax and believe it would harm the housing market. Boston’s office vacancy rates reached 23% in Q1 2024, the highest since 2010. The residential market is also under pressure, with high interest rates discouraging homeowners from selling.

 

According to a report by the Greater Boston Real Estate Board (GBREB) and Tufts University, Massachusetts communities might lose money if the tax is implemented. The report found that for every dollar collected from a 2% transfer tax in 2023, communities could lose up to $0.60.

 

While acknowledging the need for new housing, including affordable units, the GBREB/Tufts report argues that a transfer tax is not the solution, as it would inhibit property sales. Instead of alleviating the housing crisis, the tax could worsen conditions in distressed markets, potentially leading to higher rents.

 

“Massachusetts needs effective solutions for the housing crisis. This research should inform the governor, legislators, and local leaders that new taxes aren’t the answer,” said Mike Edward, chair of the GBREB and president of Perry CRE. “The state should avoid policies like transfer taxes and focus on solutions that promote new housing, reduce red tape, and ensure a stronger housing future for everyone.”

 

A separate report on a proposed transfer tax in Boston concluded that such a tax would reduce sales volume and lower prices equivalent to the tax level.

 

Implications for Real Estate Investors

Massachusetts isn’t alone in introducing a transfer tax to tackle the affordable housing crisis. Los Angeles implemented a “mansion tax” last year, charging a 4% tax on properties over $5 million and 5.5% on sales over $10 million.

 

While the tax has raised about $215 million, it has also impacted LA’s luxury real estate market and raised less revenue than anticipated, which critics say shows that such taxes don’t work effectively.

 

Given Massachusetts’ high cost of living and increased immigration, the transfer tax could exacerbate the housing market’s challenges. Sellers of luxury homes over $1 million might seek alternative selling methods or avoid selling altogether. Commercial real estate, already under significant pressure, could be hardest hit, creating a troubling real estate market in the state.

 

For real estate investors in Massachusetts, it might be prudent to explore opportunities elsewhere in the commercial and luxury real estate sectors.

 

In previous post: "What is Commercial Insurance?"

1 view0 comments

Comments


bottom of page