How Much Could a New Real Estate Tax Hurt Investors In Massachusetts—And Will It Even Work?


Massachusetts is the latest state considering a transfer tax in a bid to increase funding for affordable housing, but the controversial fee doesn’t bode well for the Bay State’s already pricey real estate sector.

State officials argue that the proposed transfer tax could inject billions into state-funded affordable housing projects, potentially alleviating the housing crisis. However, real estate experts caution that such a tax could dampen home sales and add to the challenges faced by commercial real estate developers, who are already struggling with high office vacancy rates. 

What’s in the Bill? 

The transfer tax is part of Governor Maura Healey’s $4 billion housing bond bill. Introduced in the fall, the bill has gained traction and the support of dozens of municipal leaders. If passed, cities would be able to impose a 0.5% to 2% fee on property sales that exceed $1 million.

Supporters of the provision, including Boston Mayor Michelle Wu, say the tax would help address a shortage of affordable housing in the state. According to Massachusetts Secretary of Housing Edward Augustus, the state needs 200,000 more homes to keep up with the growth in population.

“This policy is a win for local governments, but most importantly, it is a win for renters and homeowners who have otherwise been priced out,” Augustus said in a statement.

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

Why the Real Estate Industry Is Against a Transfer Tax 

Critics are skeptical that the transfer tax would be useful and feel it would actually hurt the housing market. Office vacancy rates in Boston reached 23% in the first quarter of 2024—levels not seen since 2010. The residential housing market is also under pressure as high interest rates have kept homeowners from selling. 

Massachusetts communities could actually lose money if the changes are implemented, according to a report from the Greater Boston Real Estate Board (GBREB) and Tufts University. The report found that if a 2% transfer tax were in place in 2023, for every dollar in taxes collected, communities could lose up to $0.60. 

While the GBREB/Tufts report highlighted the need for new housing, including affordable housing, it claims a transfer tax isn’t a viable solution, as it would inhibit property sales. Rather than helping ease affordable housing, a transfer tax would actually put pressure on some of the most distressed real estate markets, likely causing higher rents as a result, the report found.

“Massachusetts needs meaningful solutions to the housing crisis and this research should tell the governor, legislators, and local leaders that new taxes won’t work,” Mike Edward, chair of the Greater Boston Real Estate Board and president of Perry CRE, said in a statement. “The Commonwealth must avoid passing misguided policies like transfer taxes and instead focus on workable solutions that promote new housing, reduce red tape, and ensure the entire Commonwealth participates in a stronger housing future.”

Meanwhile, a separate report on a proposed transfer tax in Boston found that such a tax would reduce the volume of sales and lower prices equal to the level of the tax. 

What the Bill Could Mean for Real Estate Investors

Massachusetts isn’t the only state that has introduced a transfer tax to address the affordable housing crisis. Last year, Los Angeles’ so-called “mansion tax” went into effect, charging a 4% tax on properties above $5 million and 5.5% on sales above $10 million. 

While the initiative has raised roughly $215 million, it’s also hampered the luxury real estate market in LAIt’s also raised less than initially projected, which critics say is proof that such a tax doesn’t really work.

With the housing market in Massachusetts already under a lot of pressure from the high cost of living and increased immigration into the state, the transfer tax could make it worse. Those looking to sell luxury homes priced over $1 million are likely to look for alternative ways of selling or not selling at all. Meanwhile, commercial real estate is likely to be hit the worst during a time when it’s already under extreme pressure, creating a worrying real estate market in the state. 

In other words, for real estate investors in the Massachusetts market, now might be the time to look elsewhere for opportunities in the commercial and luxury real estate space.

Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Source link