“The sellers were on the fence on whether to sell, but when they considered the cliff, they decided to list,” the broker said. “They want to do this quickly. The message to me is, 'Get this done now.'”
Granted, the tax fears of the mansion-set may prove to be unfounded. Capital-gains rates could remain unchanged if a deal gets done in Washington. And the selling deliberations of the wealthy are a minor problem compared to the broader headwinds in the economy.
What's more, the rich (especially foreigners) continue to buy real estate as an investment as stocks and other financial investments weaken.
Yet the million-plus real-estate market experienced a similar spasm in 2010, when many of the wealthy feared Congress would raise capital-gains rates. Inventory popped up and and prices slumped.
Jonathan Miller, of Miller Samuel, the New York appraisal and consulting firm, said that in the fourth quarter of 2010, the supply of homes priced at $1 million or more increased in the New York area. In the affluent Hamptons, inventory increased 5 percent in the fourth quarter, a much greater increase than the same period a year earlier.
Miller said a similar or even larger increase is likely this year.
“I’m confident we’ll see just as much or more this time because of the fiscal cliff,” he said. “People are going to be pressing to close earlier than they might have.”
The math of the mansion cliff is compelling. If the Bush tax cuts are allowed to expire, the current capital-gains tax of 15 percent will rise to 20 percent. Alan Kufeld, a principal with accounting firm Rothstein Kass and an advisor to wealthy families, explains that families who sell a second home that they’ve owned for more than a year pay capital-gains taxes on the difference between the sale price and their original purchase price (minus certain fees, improvements and other deductions).
A $38 million home purchased for $8 million with $2 million in improvements could show a gain of about $28 million. The current federal tax bill on that gain would be around $4 million. If taxes go up next year, the tax would be $5.5 million – a difference of $1.5 million.
The new federal health-care tax of 3.8 percent also kicks in next year for couples who make $250,000 or more. But for the $28 million gain described above, the tax could add another $1 million, bringing the total tax difference to $2.5 million.
On primary residences, where owners have lived for more than two out of five years, there is a $500,000 exlusion. But brokers say that when a home is priced at $10 million or $20 million, the exemption is less of a factor.
In addition to the federal tax, there will also be state and local taxes applied to the gains. Some of those tax rates are also expected to go up in some states next year.
Kufeld aid his clients aren’t making long-term real estate decisions based on short-term tax issues. And the deals have to fit into a family's broader planning. But he said that since the potential tax savings are significant, “families are certainly having discussions about it. And they should.”
-By CNBC's Robert Frank
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