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

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Beginning in January, homeowners in Washington state 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?

Washington state made its transfer tax progressive in 2019, according to CBPP, with graduated rates that increase for homes sold that are worth over $500,000, $1.5 million, and $3 million. These new rates will apply as of January 1, 2020. The state cut the rate for homes worth less than $500,000.

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 Washington state, the real estate excise tax is typically paid by the seller of the property, although the buyer is liable for the tax if it is not paid, according to the state Department of Revenue.

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