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Your home may not be a mansion. But you might still have to pay a ‘mansion tax’

Beginning in January, homeowners in Washington will soon pay a real estate tax that increases based on the sale price of their home.

Under the new provision, the tax rate on properties that sell above $1.5 million will more than double, rising from 1.28% to 2.75%. Homes that sell for more than $3 million will be taxed at 3%.

And Washington isn’t the only state changing the way it taxes real estate. New York also recently expanded its “mansion tax” — an additional tax that targets higher-end home sales.

Most real estate deals in the US trigger what is known as a transfer tax. But certain states — including Connecticut, Hawaii, New Jersey, Vermont and New York — also levy a mansion tax on homes that sell above a certain price.

Sellers in some states are paying the mansion tax, while in other states buyers are footing the bill. And, in some cases, they’re paying the tax on a home even though it isn’t quite what you would consider a mansion.

What is a mansion tax?

The aim of a mansion tax is to make the state and local tax systems fairer and to raise money, says Samantha Waxman, a policy analyst at the Center for Budget and Policy Priorities. The additional taxes can be used to fund things like schools or roads, or can be specifically targeted toward things like affordable housing projects.

“Mansion taxes are one way for states to provide for their long-term future,” she said.

But how expensive does a home have to be to trigger a mansion tax?

New York’s mansion tax begins at home sales of $1 million. While $1 million may sound like a lot to some, it’s less than the median price for a home in New York City, and many buyers at that level would consider themselves middle class.

“People can have an asset identified as high value, but not identify themselves as wealthy,” said Joan Youngman a senior fellow and chair of the department of valuation and taxation at the Lincoln Institute of Land Policy.

In Vermont, the threshold is far lower — the state starts imposing its mansion tax on most properties valued at $100,000 or more, well below the median national home price of $305,000.

Who pays a mansion tax?

Using transfer taxes to raise public funds is nothing new, says Kim S. Rueben, director of the State and Local Finance Initiative at the Urban-Brookings Tax Policy Center. But more recently, some states and cities are adopting tax rates that go up as the value of the property increases, similar to income tax rates that go up as your income increases, rather than a flat tax.

In deciding who should pay these taxes, lawmakers are considering two things, said Rueben.

First: How badly does the state need the money?

“If you need the money for basic services, like Vermont, you need a lower threshold to get more people to pay,” Rueben said.

The second factor is income inequality and how housing prices in the area are widening the gap.

“In New York, they are trying to extract more from people who are buying these high-end properties, often for second or third homes,” she said.

In July, New York expanded its mansion tax. Initially, there was a supplemental tax of 1% of the purchase price for any home valued at $1 million or more. Now, that rate goes incrementally higher, with homes valued at $2 million or more subject to a 1.25% tax and those worth $25 million or more taxed as much as 3.9%.

That’s already had an impact on the market. Buyers rushed to close on sales of luxury properties in Manhattan during the second quarter before the change went into effect, according to a Douglas Elliman market report.

While some on the lower end may simply balk at having to pay a transfer tax on an average $1 million condo, those at the highest end are rethinking their purchases altogether.

A $38 million property could carry a transfer tax burden of nearly $1.5 million, says Josh Judge, an agent at Sotheby’s International Realty in Manhattan.

“Wealthy people want important homes in New York, but they are not going to overpay. They have options,” says Judge. “A million dollars is a lot of money to pay in taxes, no matter how much money you have.”

Correction: An earlier version of this story misrepresented what some home sellers in Washington State might have to pay under a new tax provision.

CNN