After New Jersey's “Mansion Tax” Increase, New Tax Court Decision May Offer Relief for Some Mixed-Use Property Owners
June 2026
While many are now familiar with New Jersey's 2025 revised “Mansion Tax” rules (N.J.S.A. 46:15-7.2), which shifted the tax burden from buyers to sellers and increased tax rates on transactions exceeding $2 million, a recent Tax Court decision suggests that certain mixed-use properties may not be subject to the tax at all.
Brief Background: The 2025 Mansion Tax Changes
As part of New Jersey's Fiscal Year 2026 budget legislation, effective July 10, 2025, the State significantly revised its Mansion Tax regime. The legislation shifted responsibility for payment of the tax from the buyer to the seller and replaced the former flat 1% tax on certain transfers of real property where the consideration exceeded $1 million with a revised graduated rate structure ranging from 1% to 3.5% of the total consideration.
The revised rates applicable to qualifying transfers are:
|
Consideration |
Tax Rate |
|
|
Over $1 million up to $2 million |
1.0% |
|
|
Over $2 million up to $2.5 million |
2.0% |
|
|
Over $2.5 million up to $3 million |
2.5% |
|
|
Over $3 million up to $3.5 million |
3.0% |
|
|
Over $3.5 million |
3.5% |
|
The 2025 legislation also modified New Jersey's Controlling Interest Transfer Tax. Transactions involving the sale of a controlling interest in an entity that directly or indirectly owns certain New Jersey commercial real estate may be subject to the same graduated tax rates, with the tax burden likewise shifted to the seller.
For many commercial transactions, the increased rates have resulted in substantial additional closing costs for the seller. A $4 million transaction, for example, now results in a $140,000 Mansion Tax obligation payable by the seller, compared to the $40,000 tax previously paid by the buyer under the former tax regime. Read “Changes to Mansion Tax and Controlling Interest Transfer Tax in NJ” from August 2025 here.
Some Good News: Mixed-Use Properties May Present Planning Opportunities
In One Main St. Edgewater, LLC v. Borough of Edgewater, the New Jersey Tax Court addressed, for the first time, how mixed-use properties should be classified for purposes of New Jersey's Mansion Tax and related transfer tax laws.
The case involved two six-story mixed-use buildings containing ground-floor retail space with residential apartment units above. Although the properties had been classified by the municipal tax assessor as Class 4A commercial properties, the taxpayer successfully argued that the properties should instead be classified as apartment properties based on their predominant residential use, which would thereby be exempt from the Mansion Tax.
In reaching its decision, the Tax Court adopted the "Predominant Use Test" by examining various factors, including: (i) the proportion of residential versus commercial square footage; (ii) the proportion of residential versus commercial income; and (iii) the overall character and use of the property. In the case before the Court, the retail portions of the properties represented less than 15% of the total square footage and total income. Based on these facts, the Court concluded that the properties were predominantly residential in nature and ordered that they be reclassified accordingly.
The reclassification reportedly eliminated nearly $2 million in Mansion Tax liability that otherwise would have been payable in connection with the contemplated sale of the properties.
Why This Decision Matters
The decision is significant as it provides a roadmap for owners of mixed-use properties whose tax classifications may not accurately reflect the property’s actual use.
Owners of mixed-use properties should not assume that the assessor's classification is necessarily determinative of the property's proper classification for transfer tax purposes. Instead, they should carefully evaluate their property's predominant use. For properties with limited retail, office, or commercial components and substantial residential occupancy, a successful reclassification could result in significant transfer tax savings.
Key Considerations for Sellers and Buyers
Owners contemplating the sale of mixed-use or commercial real estate should:
- Confirm the property's current tax classification well in advance of a contemplated sale;
- Evaluate whether the property's classification accurately reflects its actual use;
- Consider whether a reclassification challenge may be appropriate before entering into a sale transaction; and
- Consult legal and tax advisors before entering into letters of intent or definitive agreements.
As transaction costs continue to rise, careful review of a property's classification and actual use may yield substantial tax savings and should become part of the due diligence process for any significant New Jersey real estate sale.
If you have questions regarding the New Jersey Mansion Tax, Controlling Interest Transfer Tax, or the implications of the One Main St. Edgewater decision, please contact Danielle Py-Salas, Lauren Schwimmer, or any member of Flaster Greenberg's Real Estate and Land Use or Tax Law Practice Groups.
