The tax advantages are overrated IMHO. Along with that comes, HOA's, maintenience, constant work. It got to be that everywhere I looked there was a problem waiting to be done or fixed on the house, stressful. Now, I'm a happy renter!
Property tax on stocks and bonds, now there is an idea that would make Larry Kudlow's head explode! On the other hand, we are going to need to find some way to broaden the tax base to pay all of this borrowing off eventually. Personally would prefer to see a small stock transfer tax, say a penny a share, and some sort of equivelnt tax on derivatives and bonds. Market worked just fine with somewhat higher commision rates (not talking pre mayday here folks, just dial back a decade or so interms of commision costs). Might actually encourage investing rather than a casino in and out day trading mentality. Would also tend to hit those that can afford to pay.
to continue, since it is a slow night. Now where there is a problem, I call the landlord, tell him about it and say that if I don't hear from him by the next day, I will get it repaired and send pay the bill and deduct it from the rent. He always lets me do that, the problem gets fixed right away, professionally and I deduct it from the rent, we are both happy!
Referring to the special treatment for capital gains on homes, Charles O. Rossotti, the Internal Revenue Service commissioner from 1997 to 2002, said: Why insist in effect that they put it in housing to get that benefit? Why not let them invest in other things that might be more productive, like stocks and bonds?
Look who signs his checks now:
After leaving the IRS, Rossotti joined The Carlyle Group, a global private equity firm in Washington, D.C., as a Senior Advisor.
I had a tiny mortgage and when I did the math it was apparent that I would be do better paying it off and taking the standard deduction. If you live in a kow wage, low cost part of the country the tax benefit of property ownership may be illusory.
Before the housing bubble most mortgages didn't even generate a tax deduction large enough to warrant itemizing. The MID was essentially a give-away to coastal bubble markets.
Property taxes are deductible (this takes some of the sting out of them put the point is still valid). The comparison to stocks and bonds is not entirely appropriate for a different reason. The biggest tax break on home ownership is that there is no tax on imputed rental income for owner occupied units. With stocks and bonds, there is no imputed income issue.
CR, I don't know if I agree with you on this one. If I want to live in a certain area and type or residence, I must choose between buying, or renting and buying other investments instead. Either way, I will pay the property tax. So I think the property tax is moot in comparing which investment is better. Am I missing something here?
I had a tiny mortgage and when I did the math it was apparent that I would be do better paying it off and taking the standard deduction. If you live in a kow wage, low cost part of the country the tax benefit of property ownership may be illusory. trail | 12.21.08 - 12:12 am | #
You'd be amazed the number of people who still tell me the mantra "I need to buy for the tax deduction" in spite of the fact that prices are collapsing.
When I ask them whether they've done a cost benefit analysis taking into account the cost to rent, cost of the mortgage minus deduction, cost of property tax after deduction, opportunity cost lost of downpayment and other costs they can't seem to grasp that in the end.
Anyone have a tax calculator? Using CR's example, say $7500 prop tax, use a $400k loan @ 5% = $20k annual interest, total $27k itemizable deductions - say $6700 tax savings. How does that compare to the standard deduction?
but there is also a property tax for real estate. This is a tax disadvantage compared to stocks and bonds.
This is somewhat silly thing to say as good portion of property taxes go towards protecting or benefiting said property - police, fire, local streets, courts, services, etc. (The rest is levied because of our dysfunctional school funding system.) If stocks had a habit of catching on fire people would assent to a "property" (asset) tax on them, too.
It shouldn't make much difference, but a lot of people have peculiar obsessions with cutting taxes. I know people who actually think the solution to being short of money is to go buy a big house, because they'll "save on taxes". I try to explain that spending a dollar to save 40 cents, less homeownership expenses, is not the path to financial security, but often it's like talking to a brick wall.
Thanks for catching that, bondgirl. I should have said that in my original post (that renters effectively pay the property tax because it's built into the rent)
Every time I think of property taxes - and how much they are per year in good housing areas - I'm reaffirmed that renting is a great deal. One year committments, no interest rate vulnerability worth considering, no asset deflation worries, and no guilt when your city/schools are being hacked by recession tax decreases.
That Univ. WA email from previous post (on their deficit being equal to the cost of the College of Arts and Sciences), I wonder if our patchwork taxing system shouldn't be thrown out and start from scratch.
Don't quite agree with this latest posting.
Property tax revenues directly increase property values because they generally go for desirable services: snowplowing, water, sewer, police, schools, etc.
500k in a house vs 500k in bonds is a false equivalence: the bondholder presumably still has to pay rent, which means they still pay property taxes. The only real difference is that the owner's property taxes are explicit, while the renter's are bundled up as part of the rent cheque.
There's no renter's equivalent to the cap gains benefit of selling and cashing out.
indeed, property tax is built into cost of renting Bond Girl | Homepage | 12.21.08 - 12:17 am | #
It sure is on my rental property! So are all the other carrying costs! But yes, of course, the itemized deductions for taxes are also loved by most folks - it's the same mentality that gives rise to the "payment size is all that matters" in figuring out "affordability".
The value of stocks and bonds are also reduced due to the property tax paid on business owned property . . . though it depends on your assumptions about tax incidence which are generally capital (stock, bonds, etc.), labor (wages) and consumption (prices).
500k in a house vs 500k in bonds is a false equivalence: the bondholder presumably still has to pay rent, which means they still pay property taxes. The only real difference is that the owner's property taxes are explicit, while the renter's are bundled up as part of the rent cheque. MouseJunior | 12.21.08 - 12:23 am | #
When we sold our house in 2004 I stuck the proceeds into CDs. We missed the top by a year, but taking all costs into account we ended up netting out near the top due to the return on my CD investments.
Scott(Unrated) writes: \tThe value of stocks and bonds are also reduced due to the property tax paid on business owned property . . . though it depends on your assumptions about tax incidence which are generally capital (stock, bonds, etc.), labor (wages) and consumption (prices). Scott | 12.21.08 - 12:25 am | #
Hey! Get your own handle! There are two Scotts on here...I think I was first!
It's funny to even be discussing $500K homes. Before the bubble the median U.S. home was what, $100K? Even in the priciest coastal markets $500K used to be considered "luxury" properties only owned by the very top end of the middle class.
The false "tax advantages" are overly stated because of all the realtor shills running around. Most of them can't spell cd and compounding interest so they push the company tag lines.
"Never mind not being to write off losses in residential real estate.
sunsetbeachguy | 12.21.08 - 12:28 am | #"
Good point, sunsetbeachguy. The recent change in tax rules allowing the homeowner's income from a short sale write-off to be tax-free is effectively a tax deduction for the loss (available only to those who used very little of their own money to buy/own the house).
Well we were planning to buy another house in a couple of years and needed the money again which is why I didn't put the money into anything risky.
Pissed Off In California
~~~~
Smart ... I put some of mine into "safe" munis and I am getting trashed.
I figure I'm down about 5% on my stocks and bonds . I liquidated last Friday ...
but there is also a property tax for real estate. This is a tax disadvantage compared to stocks and bonds.
property tax is deductible against income. And 1% pa -- fixed in Prop 13 states -- isn't that big a deal when appreciation is 10%+. Hell, if you can catch 1 refi down 100bps or so you've just eliminated the property tax expense.
On the other hand, we are going to need to find some way to broaden the tax base to pay all of this borrowing off eventually.
Just tax the unimproved value -- ie site value -- of all real estate.
If we did this we could cut or eliminate income taxes, sales taxes, and property taxes on fixed improvements and cars.
This is the bleedingly obvious solution that has been eliminated from the discussion since the neoclassical economists intentionally blurred the difference between land and capital wealth.
The tax deductions for home ownership are discounted into the price of the home. You have to pay more for your home in order to get the tax deduction. Bottom line, there is no tax advantage.
All of this discussion about how consumers need to rebuild their balance sheets. Could someone please explain why? I mean this seriously...why should I care whether consumers have a decent balance sheet....they were the people who got us into this mess in the first place. I care more as to whether government and business has a troubled balace sheet. Consumers deserve what they get...take your punishment and keep spending....that's your job.
The problem with our system is that we can take out frustrations against government (vote them out...like the GOP) and business (boycott them....like I do with Wal-Mart), but there are no ways to take out your frustrations against fellow stupid consumers that got us into this mess.
Silly CRbots, I may be spending one dollar to save forty cents but when those winnings are highly leveraged into a rising RE price, they're multiplied tenfold!!!!!!
CR, don't forget the irrational and/or unsophisticated buyers. Specious claims about the merits of such incentives have a profound effect on Joe 6-pack.
This is in the same vane as "buy now since mortgage rates are low".
there are no ways to take out your frustrations against fellow stupid consumers that got us into this mess.
Liquidate GM pretty please
~~~~
Government and banks were supposed to be the adults and say NO to people that couldn't pay the money back ... but since it wasn't their money but ours ... that didn't happen.
Good post. This was part of the reason I whimped out of purchasing a house in 2002, and have never bought one since. Doing all the math, I just couldn't understand what kind of tax advantage I would be seeing. The real estate agent and mortgage broker kept coming up with all kinds of wonderful tax savings I would benefit from. Further at the time I was helping a friend redo his just purchase home. And all the minor fixes he was putting in were adding up to a major cost. Plus the 30 year mortgage relationship.
In my opinion, I saved more renting, didn't have to worry about paying for any repairs, and I could move to a new place every 9 months to a year. Plus there was never the 30 year mortgage relationship to endure. Case in point, I rented a four bedroom condo off Clearwater Beach in Fl, and had a couple of roomates. If I bought the place, my costs would have been (after renting out 2 rooms) $2400 a month. Renting a place in the same building (on a higher floor) cost me $1080 a month. And I saved on repair related costs. Within a year I moved to Davis Island in Tampa. Renting cost me $1230. Purchasing would have cost me $2800. Really these were significant savings over a year.
CR: <i>I'm not arguing for or against any particular tax treatment here, I just think when comparing the tax treatment of various assets, maybe we should consider all taxes.</i>
unfrotunately you are arguning asif facts matter to the people with whom you argue.
The de-regulationistas, surrounded by the catastriophic outcome of their policies, are now like some embarrassed toddler standing in a puddle of urine and pointing at the dog. "It was "CRA!" Yeas, except for all the facts. "It was the Clinton '97 cut" Yeah all excett the timing. "It was the GSEs!" Yeah except they were under the exectuive branxch the whole time and that pesky thing wioth "conforming limits kept thwem out until this was baked in.
There will be a steady stream of this crap, which we mus debunk at every opportunity.
Maybe Jas Jain and I can figure out how to turn parts of the Inland Empire into an above ground nuclear testing site. Hmmm.... Liquidate GM pretty please | 12.21.08 - 1:11 am | #
A while back I had suggested that the upper stretches of Las Vegas be (e.g., Aliente) turned over to Nellis for suburban warfare training. Might as well get some real use out of it.
In my opinion, I saved more renting, didn't have to worry about paying for any repairs, and I could move to a new place every 9 months to a year. Plus there was never the 30 year mortgage relationship to endure.
OTOH, after 30 years your housing expense goes to $0 or thereabouts.
My mom paid off her house in October, so SSA is actually a livable income now.
Granted, if you can save the $5000/yr or whatever and have $300,000 of assets earning 5% then it's a wash.
"Spending, Home Sales Probably Tumbled:
U.S. Economy Preview"
The contraction in spending during the current downturn is likely to prove more severe than in any downturn since the Great Depression, Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, said in note to clients.
Comrade Bear (tj & the bear) writes:
Maybe Jas Jain and I can figure out how to turn parts of the Inland Empire into an above ground nuclear testing site. Hmmm....
Liquidate GM pretty please | 12.21.08 - 1:11 am | #
A while back I had suggested that the upper stretches of Las Vegas be (e.g., Aliente) turned over to Nellis for suburban warfare training. Might as well get some real use out of it.
Comrade Bear (tj & the bear) | 12.21.08 - 1:20 am | #
Gosh, Bear...why would we need to train the military for suburban warfare in the US? Hmmm.....
Some data points here in Charlotte. The malls have plenty of cars ... with clogged roads nearby. People feel they need to buy gifts, and are doing it.
But I'm seeing cutbacks in "fluff" spending. Traffic in restaurants and nightclubs is definately down.
Just this week, I went to two small karaoke shows at some local restaurants. The ONLY diners were a handful of karaoke singers. No "off the street" traffic at all buying dinner. I have to think these places will cut waitstaff if this continues.
I'm seeing nightclubs dropping live music nights and using DJs. My nearest "organic food" market is a ghost building after 8PM. They eliminated the cashier at the salad bar.. now you have to carry your salad to the front row of cashiers by the entrance.
I feel like the first leg down has begun. But we're not yet seeing the cutbacks in services that I saw in 1991. (Shorter public library and parks hours, for example.)
We bought a modestly-size house when our incomes were high and paid it off in ten years. In those days, houses were not so severely overpriced here.
These days, we make less than half what we did in our heydays -- but since we make no monthly payment, nor pay any rent, we still live more or less as we did.
Rent on this house, around here, would be close to two grand. Between taxes, insurance, and repair allowance, we're in for maybe $600-$650 a month, averaged out. You can't even rent a studio around here for that
Chinese Premier Wen Jiabao, in a surprise visit to a Beijing university, tried reassuring students they would be able to find jobs amid the current global economic woes, and promised more unspecified steps to help the economy.
Rising unemployment has fed Beijing's fears of unrest as forecasts for China's growth next year fall below 8 percent, seen as a minimum needed to create jobs and maintain social stability after years of double-digit expansion.
"Your difficulties are my difficulties, and if you are worried then I am more worried than you," Wen added. Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor
I think that anyone who buys a home as an investment is deluded. You buy because you want to own a home, not because you want to maximize profit, that is, you buy where you want to live as the primary consideration and then you rationalize the rest. Like most everything destined for personal consumption, personal taste takes priority to the practical exclusion of all else.
This supports my theory that foreclosures are good for Federal Tax revenues. I paid about 4/7th less taxes with my house in CA than I do now without it. It's too bad that CA is getting screwed over, but the problem there is that the property taxes are not high enough. They need to be 3-4%, which will keep prices low and affordable. CA will always have the jobs, unlike states like NY.
"Purposeful domestic resistance" would require military to "rapidly determine the parameters defining the legitimate use of military force inside the United States."
A recent report produced by the U.S. Army War Colleges Strategic Institute warns that the United States may experience massive civil unrest in the wake of a series of crises which it has termed "strategic shock."
The report, titled Known Unknowns: Unconventional Strategic Shocks in Defense Strategy Development, also suggests that the military may have to be used to quell domestic disorder.
"Widespread civil violence inside the United States would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security," the report, authored by [Ret.] Lt. Col. Nathan Freir, reads.
After the New Year holiday is the Chinese New Year, so that puts the real test of social stability in February...
Protest by suitcase workers sent packing in China
DONGGUAN, China Laid-off migrant worker Chen Li had red scrape marks on his right cheek from a scuffle with riot police outside his factory that went bust this week in southern China.
Now the angry young man is going home early to his village in northern Hubei province for the annual Chinese New Year holiday, where he says he will be bored and idle for a couple of months. It's restless migrants like Chen who are among the biggest worries for Chinese leaders trying to maintain social order during a souring economy.
"I've grown used to living in the city now," said Chen, 25, looking urbane Friday in a new but slightly dusty blue suit. "I just can't stand the country life anymore."
During boom years, workers like Chen would still be toiling on the assembly line, looking forward to banking another month or so of pay before the Chinese New Year, which begins Jan. 26. But this year thousands of factories have gone belly up in Guangdong province the country's main manufacturing hub forcing the migrants to head home early.
With the global economic downturn, Christmas export orders were down for Chinese factories, and more bad economic news has followed. In November, growth in China's factory output fell to its lowest level in nearly seven years. More than 7,000 companies in Guangdong closed down or moved elsewhere in the first nine months of the year, the official China Daily newspaper reported.
For workers like Chen, the chances of finding another job are low. This is the slow season, with Christmas orders already shipped off. A new hiring frenzy normally kicks off after the New Year holiday, when migrants flood back to industrial zones in one of the world's biggest annual human migrations.
Until then, authorities will be under pressure to keep a lid on discontent in villages, where many workers may still be simmering over how their jobs came to a bad end.
It has become common in Guangdong for factory owners to suddenly shut down their cash-strapped plants and disappear without paying laborers. Yahoo! 404 - Page Not Found
A World Enslaved
There are now more slaves on the planet than at any time in human history. True abolition will elude us until we admit the massive scope of the problem, attack it in all its forms, and empower slaves to help free themselves. Foreign Policy: Error
If you own a $500 thousand home, you probably pay $5 to $10 thousand per year in property taxes. If you own $500 thousand in stocks and bonds, how much do you pay per year in property taxes (just for owning them - not selling them)?
We have just found a way to eliminate the deficit!
Well at least prop taxes are an offset on fed tax liability + a small homestead exemption that lowers the initial prop tax as well.
How about 1031 exchanges? Depreciation?
These factors also weighed in; sucking more investment into real estate than might otherwise be warranted.
There were/are a lot of lousy RE "investors" that had their primary + a little something on the side... another house (which financing was often obtained fraudently by having more than one prop be "owner occupied"), a duplex, 3 unit, or 4 unit. They held/hold on way past party time because they "didn't want to pay taxes" - a lousy 15%. Now the whole deal is/was underwater.
patientrenter wrote, If I want to live in a certain area and type or residence, I must choose between buying, or renting and buying other investments instead. Either way, I will pay the property tax.
That's NOT true.
You can divide the property tax into two components: the part falling on the improvements and the part falling on the land.
The part falling on the land CANNOT be passed onto tenants. Rather, tenants pay the full rental value of the land to the landowner. The landowner pays the property tax (the fraction falling on land) out of the rent.
If you increase the property tax falling on land, the rent is unchanged. The government gets more of the land rent, and the landowner gets less, but the tenant's payment is unchanged.
This fact has been known since Ricardo came up with his law of rent hundreds of years ago.
Anonymous wrote, This is somewhat silly thing to say as good portion of property taxes go towards protecting or benefiting said property - police, fire, local streets, courts, services, etc. (The rest is levied because of our dysfunctional school funding system.) If stocks had a habit of catching on fire people would assent to a "property" (asset) tax on them, too.
No, they're levied because the part of property tax that falls on land is the most efficient and equitable tax there is.
Efficient: because the supply of land is fixed, the land tax is nondistorting.
Equitable: the returns to land (sans improvements) are pure economic rent and not the product of the landowner, unlike returns to labor and capital.
History shows that polities that rely on land taxes (and less so on taxes on labor, consumption, and capital) thrive.
Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents and the ordinary rent of land are, therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them.---Adam Smith
In my opinion, the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.---Milton Friedman
1) The property tax is deductible
2) Gains on sale for primary are exempt if you qualify
3) Gains on sale for like kind investment property are deferred if you qualify
So, the question should be, in the end, which is better?
Be taxed, get the deduction, and pay no capital gains up to X if you are a primary OR buy stocks, and pay cap gains if you profit?
Don't forget discriminatory property tax schemes like Prop 13 in Ca, and SOH in Florida, which encourage misallocation of housing capital. Imagine if your income tax was based on the starting salary for your current job, or tax on dividends was based on the amount at the time the investor bought the stock.
The difference between your wage increase and home value increase is, your home does not increase in real wealth value. The real wealth value does not appear until it is sold and real money passes hands. Assessments are guesses not real wealth back value. If you get a wage increase it is real when you get paid. Stock dividends and bonds become real when proceeds are distributed.
Another thing on property taxes is you don't own anything till the mortgage is paid off. You just agree in the loan to be responsible for them.
liberal wrote, "History shows that polities that rely on land taxes (and less so on taxes on labor, consumption, and capital) thrive."
Thrive? Define "thrive".
Certainly the moral and ethical basis of those polities don't "thrive". That's because property tax is the LEAST moral tax there is. To be precise, it is a tax with ABSOLUTELY NO moral basis.
If you have to pay someone every month to own something--or they will not let you use it anymore-- YOU DON'T OWN IT. The taxing entity has TAKEN IT FROM YOU and simply letting you use it for as long as you pay tax on it.
Property tax is a tax that makes a mockery of the word "property".
Why not let them invest in other things that might be more productive, like stocks and bonds?
This statement deserves scrutiny.
We really need to redefine investing. Dumping money into existing stock & bond issues hardly seems like investing anymore. Herd behavior or inflation gathering is more apt.
Why not let them invest in other things that might be more productive, like stocks and bonds?
This statement deserves scrutiny.
We really need to redefine investing. Dumping money into existing stock & bond issues hardly seems like investing anymore. Herd behavior or inflation gathering is more apt.
Oops. Sorry for the double post, I don't like to post anonymously.
And someone wrote that the ability to like kind exchange is a tax advantage. Like kind exchange is applicable ONLY to business property, not your personal residence.
You mean like a business property that's actually an investment and not merely a personal choice between owning and renting? No one tries to draw a distinction between owning a stock and renting one.
The difference between your wage increase and home value increase is, your home does not increase in real wealth value....
You did not respond to my point, which is that taxing properties with the same market value and imputed or explicit rental income at rates depending on price of acquisition leads to misallocation of capital.
Just as taxing labor based on starting salary with a firm would lead to a misallocation of labor.
Well, I don't think your argument holds water. You pay property tax whether you rent or own. Just becasue you are renting doesn't mean you are not paying the property tax. You may not be writing the check to the county tax dept, but I promise, you are still paying those taxes as a renter.
fIn a quick perusal, I didn't see anybody mention the lack of a capital loss when selling a home for less than you paid for it. That's certainly a disadvantage in these times and has occurred to me!
CR
I'm not arguing for or against any particular tax treatment here, I just think when comparing the tax treatment of various assets, maybe we should consider all taxes.
True ..... but what real estate offered was leverage. Most persons can't buy stocks or bonds with a > 5 to 1 leverage.
The irrationality with respect to home ownership is based on the idea that home values will always go up, as they have historically. We need to get back to the concept that a house is a place to live and if it appreciates it is just a bonus.
I think the current depreciation of homes will stay in the national consciousness for a long time!
My point is to have true value it has to be backed with true wealth. The true wealth can only be created at point of sale. Look at all on a cash basis. Wages are increased and tax increase is immediate. Yes, if you were paid on the hiring wage and not the raise that would be missallocation of taxes. For RE to change in real wealth backed value like a pay increase, where is the increased money in your pocket like a pay raise? I think Prop 13 is basically supporting true wealth backed value.
CR, the two are rather different because you typically own stocks outright. Still, at a typical dividend yield of 2-3%, you might be paying taxes of 0.8% to 1.2% if you are in the higher income bracket and live somewhere like CA which has high state taxes. Not much different than property tax rates in CA.
Now, the big difference is that for stocks you are paying taxes BECAUSE you are receiving income. For owner occupied homes, you generally don't receive any cash income unless you sell. That makes it more like a nondividend yielding stock, or even a zero coupon bond. With corporate zeroes, you have to pay taxes even though you don't receive any cash income. However, zeroes have a definite payout at the end of their term.
"awgee writes:
The tax deductions for home ownership are discounted into the price of the home. You have to pay more for your home in order to get the tax deduction. Bottom line, there is no tax advantage."
Actually, it's worse than that. In a normal market, the people in the highest tax bracket who would buy a certain type of house set the marginal price. This means that other people end up paying more aftertax for the same home. This is made most obvious when you look at a 0% buyer vs an all cash buyer.
"OTOH, after 30 years your housing expense goes to $0 or thereabouts."
No. Maintenance, insurance, property taxes are still there. All of those go up over the years. Property taxes in CA will almost double over the 30 years if home prices rise. Insurance and maintenance will almost triple. Even with the mortgage paid off, the aftertax cost of ownership in 2039 would be higher than in 2008 when you also had a mortgage.
Comparing a primary residence with stocks and bonds is complicated by the fact that the former provides shelter, emotional, and social status services.
Home buyers need to subtract the value of those services to get net cash flow.
Only somewhat related, but I think the government should levy an additional tax for vacant properties (say, 90 days vacant) on the owner. If that tax is steep enough, owners will have a strong incentive to get people into the homes, which is good for everyone.
Hardly anything here about what this legislation did for investment...skippin ova the question about how smart itwas for the investor. This legislation occurred at a specific time propelled by specific interests who thought they saw the high tech boom fading. You only need to examine the employment in the real estate sector vs it's competitors to see that the US economy turned decidedly Housing-centric after 1997. ..it does suggest a longer than usual recession. It does.
Also, real estate people never mention the IRS "recapture of depreciation." When you sell the property, all those great deductions are taken back in the form of taxes.
Even most real estate books do not mention that.
One of the most surprising things when I did the detailed analysis was that the cost of owning a home wasn't much of an inflation hedge, even with a fixed rate loan. Why?
Other costs like property taxes, insurance, and maintenance go up over time, even with a fixed rate loan.
The portion of your monthly payment which is interest drops every month. So does any mortgage interest tax deduction. This makes the aftertax cost of having a fixed rate mortgage rise every single month. By the time you get to your last payment, there is virtually no mortgage interest deduction. The aftertax cost of a 6.5% fixed rate mortgage rises by 2.5% each year initially. It rises by over 3% each year toward the end of the loan (when principal amortization is the fastest).
Underlying assumptions: 6.5% interest rate mortgage, 30 year fixed loan, 25% federal tax bracket, no state taxes. If you redo this for someone in the top tax bracket and in CA (40% combined marginal rate), the cost increases 3.1% from year 1 to year 2. It rises by over 4% per year near the end of the loan.
Bet you never heard this from a real estate agent.
I think Prop 13 is basically supporting true wealth backed value.
Nonsense. Real wealth means real goods and services. Two identical houses represent the same real wealth and real value of accommodation.
So why should one pay more taxes than the other?
Prop 13 was a Ponzi scheme designed to shift the burden of property taxation away from old buyers to new buyers. It worked as long as property values kept going up. Now that they are falling it will self-destruct.
If the property taxes are presumed to be included in your rent, then so should everything else, including the benefits of the property tax deduction, and the costs of maintenance, etc.
The fact is that this is not true. The cost of rent is based on supply and demand, not the cost of ownership to the landlord. Do you think the landlord is going to let his units go unrented because he can't find a renter who will pay the full cost of his mortgage, property tax, improvements, etc? That's why at some times it's a better deal to rent than to buy, and vice versa. The markets don't work perfectly, and right now renters are not paying the full cost of ownership that landlords are bearing.
liberal: I think your argument of tax/cost pass-throughs hinges on the assumption that sellers/owners already charge the maximum price they can extract from buyers/renters, and have to absorb the cost as they cannot hike prices further.
However, this is only true in a monopoly situation, which I don't think is an accurate characterization of most rental markets. In many cases, prices are set in a competitive environment where cost structure is a parameter. When all sellers are exposed to a similarly higher cost structure, prices can indeed rise across the board -- up to the point of what buyers can pay, beyond that you get into "market failure" territory.
I think your argument of tax/cost pass-throughs hinges on the assumption that sellers/owners already charge the maximum price they can extract from buyers/renters, and have to absorb the cost as they cannot hike prices further.
Actually economists agree that taxes cannot be passed on to the renter.
Rents are perfectly free to go below cost basis. Any market rent is better than NO rent (excluding rent-controlled units of course).
"Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground" -- Adam Smith
That's because property tax is the LEAST moral tax there is. To be precise, it is a tax with ABSOLUTELY NO moral basis.
vs.
"In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago. " -- Milton Friedman
"Nonsense. Real wealth means real goods and services. Two identical houses represent the same real wealth and real value of accommodation."
Not so, when a house goes up in tax value (especially in an out of control false market as some areas have) where is the wealth to back it up? No one deposits money in your savings account do they? leveraging against this perceived value is not wealth but an assumption. The preconceived wealth does not exist unless sold at market price. Consider the state of CA budget woes. They spent this new false property tax income that is now correcting as property values on recent sales fall back to reality of wealth, not excessive leveraged wealth which helped fuel false prices. Think of the "spend it all" policy government has had with the win fall tax income and how much more debt CA would have now with out prop 13. Houses are only worth what some one is willing to pay on the day it sells, not a guesstimate of value. Lots of false assumptions that really have fueled todays mess. Think on a cash basis not a leveraged basis that amplifies false values. Prop 13 is doing it's job with stability that the undisciplined have wrecked the economy.
Prop 13 is doing it's job with stability that the undisciplined have wrecked the economy.
What the hell? Home prices tripled from 1997 to 2007. Some stability.
BTW, I agree that owner-occupants of SFHs should in principle be insulated from rising tax bills. LVT should be applied to commercial, "investment" property, and vacant land.
Home mortgage interest deduction is limited to personal residence and one other property; investment buyers do not benefit. Assuming one even itemizes (not an easy assumption), real estate is a tax net negative.
No, landlords do not have to rent their properties. Landlords who don't get the rent they want can survive on the tax savings for a year (assuming they have other income). That's one of the reasons rents are "sticky" on the down, but not nearly so "sticky" going up.
Rents generally track house prices (Dean Baker's point in arguing that there was a developing bubble in 2002) and both are tied to the income of the community in which the housing is located. Because there's no speculative interest in housing for tenants, real estate bubbles don't generally increase rents, so in bubble markets the cost of buying has far outstripped the cost of renting.
But, as John Gilderbloom found many years ago, rents have nothing to do with vacancy rate (supply and demand). They're most determined by (a)the cost of the alternative, (b) the median income of the community, or what the market will bear, and (c) the professionalization of the rental industry, or price-fixing.
"What the hell? Home prices tripled from 1997 to 2007. Some stability."
So you agree property values have risen out of alignment with income and rents? This is why they are crashing now? The state spent all of this win fall tax increase Actually slowed by Prop 13 lower tax collections. The tax shortage would be far worse with out it now.
I left CA in the 70's when I thought the mother of stupid happened when my house sold for more then double what I paid in less then five years. I have been shaking my head in wonderment since then.
Actually slowed by Prop 13 lower tax collections. The tax shortage would be far worse with out it now.
We wouldn't /have/ a tax shortage with LVT, LOL.
I left CA in the 70's when I thought the mother of stupid happened when my house sold for more then double what I paid in less then five years
In the mid-70s My parents were renting a 3BD in El Cerrito for $300/mo. I remember them looking at houses in the $45K range, which was inline with rents.
The 1970s did feature a wage-price spiral which of course made its way into land values.
The property tax and interest you write off.
Depends how fast it appreciates.
IMO the tax free capital gains is key. Where else can you pocket 1/2m tax and risk free every couple of years. This is what drove the very high end property.
If you are just going to live in it smaller is better, as long as it is in a safe neighborhood.
"By the time you get to your last payment, there is virtually no mortgage interest deduction. The aftertax cost of a 6.5% fixed rate mortgage rises by 2.5% each year initially. It rises by over 3% each year toward the end of the loan (when principal amortization is the fastest).
Underlying assumptions: 6.5% interest rate mortgage, 30 year fixed loan, 25% federal tax bracket, no state taxes. If you redo this for someone in the top tax bracket and in CA (40% combined marginal rate), the cost increases 3.1% from year 1 to year 2. It rises by over 4% per year near the end of the loan."
Sorry, had some other costs in that model besides mortgage. For just the mortgage, it's 0.7% increase initially in the aftertax cost of a fixed rate mortgage with a 40% combined tax rate, but 2.2% toward the end of 30 years. For 25% tax bracket it's a 0.3% increase initially and 1.4% near the end of 30 years.
The wages did not keep track with the huge price rise in property. That is why the liar loans where used to support false property values. Those who bought and stayed protected by prop 13 are not the defaults now causing the shortage of tax money. The real problem most governments have is does not show respectful discipline with public money. They spent way to much creating a tax void from the bubble bust. Spending is the first problem.
Hmmm.... the matrix on the investment is very different re: owning the home you live in and investing in real estate. In many areas, SoCal, Florida, etc. the cost of ownership was driven up to a point where it made little sense to do either. However, since the prices have come down, that might change. But, if you choose to not own the home you live in, one of the costs needed to be added in for sure is the rent you pay. Truth is that over the long haul very few people are able to save/invest enough to acquire any wealth outside of that forced savings account some people call their home! Take their home equity away from them and they are almost penniless!
Meanwhile back at the ranch, people who know what they are doing are still making money investing in real estate.
This all depends on if you're looking at it as an investor or as a home owner. As an investor, there is no tax disadvantage - your renter pays your mortgage and taxes, and if he wouldn't then you don't invest.
From an investor's point of view, there is no tax disadvantage. That is all.
With respect to stocks, you're not quite right. Real estate is an important part of the assets of many corporations, so if you own shares in a corporation with real assets the tax is passed on to you. Fixed machinery and inventory (like cars at an auto dealership) are subject to the personal property tax, which as a generalization has comparable rate to the tax on real property. Therefore the personal property tax is also passed on to stockholders in the form of lower earnings.
Prop 13 is doing it's job with stability that the undisciplined have wrecked the economy.
Prop 13 encouraged excessive local government spending because it allowed existing homeowners to benefit from services which they didn't have to pay for. The cost of the services was passed on to new homeowners who bought at a higher price and paid higher taxes on the same house.
If the cost of services had been borne equally by homeowners, all homeowners would have had an incentive to vote for local governments that spent less money.
As I said, it's an obvious Ponzi scheme which is now collapsing because new buyers no longer pay higher taxes because RE prices are now declining.
Angry Saver wrote: "Why should anyone get to own the land. They didn't create it. The improvements on land can be owned, but the rent on the land is a fair tax."
You make an idiotic argument-- on the one hand you say that "nobody" should own the land... on the other hand you imply that the State should own the land (as that is the taxing authority).
If "nobody" owned the land then there would be no taxes, and we would revert to some sort of state of nature, and concepts of ownership would revert to as they were under the Native Americans, say.
Now that might be interesting. But you clearly are advocating a position that the State should own the land.
If we have learned NOTHING over the last 100 years, it is that the State is the WORST and LEAST RESPONSIBLE owner of anything.
Land ownership is created by the State. If there is no State, there is no land ownership, because there is no authority to enforce it. There was no land ownership in the US prior to European settlement.
Since it is the State itself that has created land titles that allow the owner to collect economic rent from land and to sell the land to someone else, it has every right to tax land.
There is a far stronger case to be made for allowing the State to tax land than to tax labor, which predates the State and is independent of it.
The 1997 tax break on selling your home made it possible to sell at a profit and pay no capital gains tax on up to $500,000. The prior law was more generous. Prior to 1997 you could sell at a profit and pay no capital gains tax with no limit on the amount - provided you bought another home of equal or greater value.
The old law created an incentive to reinvest upward. That is, to increase your real estate position. The new law enabled you to sell and either downsize or exit the market without paying tax. The old law also had a small one time provision for retirees selling to avoid tax as well.
So the real benefit of the 1997 law was to extend the existing tax exception to people who sell without repurchasing (but with a limit on the untaxed amount).
"As I said, it's an obvious Ponzi scheme which is now collapsing because new buyers no longer pay higher taxes because RE prices are now declining."
The Ponzi scheme is not prop 13 it is government squandering of the bubble tax money. Fair is never a realistic part of life. Fair would be living in a state that requires a balance budget as I do and now I get slammed with $24K (according to Bloomberg a few weeks ago) of new government debt growing everyday, do to others lack of discipline. Is this fair? I don't even live in a state with a housing bubble problem. We will only have a minor correction of 10% at best. Our property tax rate is 2.2% but at the top the average house was less then $200K.
I think you answered your own question in the fact the collapse takes away tax money from false values that where never there. If one can't afford the taxes they should have considered buying less house to begin with. Looks like a lot of people didn't do their responsible accounting before they bought.
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first?
you are right, of course, but nobody thinks beyond the itemized interest deductio
I don't know; my house is valued at $370K, and I pay $8400 in property taxes. YMMV.
Good.
New playground to mess up.
Good point!
The tax advantages are overrated IMHO. Along with that comes, HOA's, maintenience, constant work. It got to be that everywhere I looked there was a problem waiting to be done or fixed on the house, stressful. Now, I'm a happy renter!
Property tax on stocks and bonds, now there is an idea that would make Larry Kudlow's head explode! On the other hand, we are going to need to find some way to broaden the tax base to pay all of this borrowing off eventually. Personally would prefer to see a small stock transfer tax, say a penny a share, and some sort of equivelnt tax on derivatives and bonds. Market worked just fine with somewhat higher commision rates (not talking pre mayday here folks, just dial back a decade or so interms of commision costs). Might actually encourage investing rather than a casino in and out day trading mentality. Would also tend to hit those that can afford to pay.
to continue, since it is a slow night. Now where there is a problem, I call the landlord, tell him about it and say that if I don't hear from him by the next day, I will get it repaired and send pay the bill and deduct it from the rent. He always lets me do that, the problem gets fixed right away, professionally and I deduct it from the rent, we are both happy!
the baseline tax deduction when not itemizing is never backed out of the "tax savings" during the sales pitch for housing, either.
Lets tax the banks for lax lending.
Lets tax the investment houses for loose practices.
Lets tax the brokers and hedgies for feeding the Madoff affair.
Lets tax the automobile firms for producing cars nobody wants.
With all this tax money we can spend, spend, and spend.
CR, why do you think there is a rationality to the law that is independent of congressional political needs?
Referring to the special treatment for capital gains on homes, Charles O. Rossotti, the Internal Revenue Service commissioner from 1997 to 2002, said: Why insist in effect that they put it in housing to get that benefit? Why not let them invest in other things that might be more productive, like stocks and bonds?
Look who signs his checks now:
After leaving the IRS, Rossotti joined The Carlyle Group, a global private equity firm in Washington, D.C., as a Senior Advisor.
Dirk - nice story about Chuckast thread
Thanks, my bro e-mailed it to me and thought I should share it here
I had a tiny mortgage and when I did the math it was apparent that I would be do better paying it off and taking the standard deduction. If you live in a kow wage, low cost part of the country the tax benefit of property ownership may be illusory.
Before the housing bubble most mortgages didn't even generate a tax deduction large enough to warrant itemizing. The MID was essentially a give-away to coastal bubble markets.
Property taxes are deductible (this takes some of the sting out of them put the point is still valid). The comparison to stocks and bonds is not entirely appropriate for a different reason. The biggest tax break on home ownership is that there is no tax on imputed rental income for owner occupied units. With stocks and bonds, there is no imputed income issue.
Depends on what kind of bonds you own...
CR, I don't know if I agree with you on this one. If I want to live in a certain area and type or residence, I must choose between buying, or renting and buying other investments instead. Either way, I will pay the property tax. So I think the property tax is moot in comparing which investment is better. Am I missing something here?
The advantage of home ownership is you get to have your cake and eat it too.
In good times you could stay at a place and get up to $500,000 in capital gains free ... in three years ! Some pushed it to less than that.
No deuctions for stocks and bonds and you can't live in them. .
But ... all that was in the good times.
indeed, property tax is built into cost of renting
I had a tiny mortgage and when I did the math it was apparent that I would be do better paying it off and taking the standard deduction. If you live in a kow wage, low cost part of the country the tax benefit of property ownership may be illusory.
trail | 12.21.08 - 12:12 am | #
You'd be amazed the number of people who still tell me the mantra "I need to buy for the tax deduction" in spite of the fact that prices are collapsing.
When I ask them whether they've done a cost benefit analysis taking into account the cost to rent, cost of the mortgage minus deduction, cost of property tax after deduction, opportunity cost lost of downpayment and other costs they can't seem to grasp that in the end.
costs-savings = profit.
Trail - exacrly.
Anyone have a tax calculator? Using CR's example, say $7500 prop tax, use a $400k loan @ 5% = $20k annual interest, total $27k itemizable deductions - say $6700 tax savings. How does that compare to the standard deduction?
but there is also a property tax for real estate. This is a tax disadvantage compared to stocks and bonds.
This is somewhat silly thing to say as good portion of property taxes go towards protecting or benefiting said property - police, fire, local streets, courts, services, etc. (The rest is levied because of our dysfunctional school funding system.) If stocks had a habit of catching on fire people would assent to a "property" (asset) tax on them, too.
It shouldn't make much difference, but a lot of people have peculiar obsessions with cutting taxes. I know people who actually think the solution to being short of money is to go buy a big house, because they'll "save on taxes". I try to explain that spending a dollar to save 40 cents, less homeownership expenses, is not the path to financial security, but often it's like talking to a brick wall.
Thanks for catching that, bondgirl. I should have said that in my original post (that renters effectively pay the property tax because it's built into the rent)
Every time I think of property taxes - and how much they are per year in good housing areas - I'm reaffirmed that renting is a great deal. One year committments, no interest rate vulnerability worth considering, no asset deflation worries, and no guilt when your city/schools are being hacked by recession tax decreases.
That Univ. WA email from previous post (on their deficit being equal to the cost of the College of Arts and Sciences), I wonder if our patchwork taxing system shouldn't be thrown out and start from scratch.
Don't quite agree with this latest posting.
Property tax revenues directly increase property values because they generally go for desirable services: snowplowing, water, sewer, police, schools, etc.
500k in a house vs 500k in bonds is a false equivalence: the bondholder presumably still has to pay rent, which means they still pay property taxes. The only real difference is that the owner's property taxes are explicit, while the renter's are bundled up as part of the rent cheque.
There's no renter's equivalent to the cap gains benefit of selling and cashing out.
indeed, property tax is built into cost of renting
Bond Girl | Homepage | 12.21.08 - 12:17 am | #
It sure is on my rental property! So are all the other carrying costs! But yes, of course, the itemized deductions for taxes are also loved by most folks - it's the same mentality that gives rise to the "payment size is all that matters" in figuring out "affordability".
The value of stocks and bonds are also reduced due to the property tax paid on business owned property . . . though it depends on your assumptions about tax incidence which are generally capital (stock, bonds, etc.), labor (wages) and consumption (prices).
500k in a house vs 500k in bonds is a false equivalence: the bondholder presumably still has to pay rent, which means they still pay property taxes. The only real difference is that the owner's property taxes are explicit, while the renter's are bundled up as part of the rent cheque.
MouseJunior | 12.21.08 - 12:23 am | #
When we sold our house in 2004 I stuck the proceeds into CDs. We missed the top by a year, but taking all costs into account we ended up netting out near the top due to the return on my CD investments.
Scott(Unrated) writes:
\tThe value of stocks and bonds are also reduced due to the property tax paid on business owned property . . . though it depends on your assumptions about tax incidence which are generally capital (stock, bonds, etc.), labor (wages) and consumption (prices).
Scott | 12.21.08 - 12:25 am | #
Hey! Get your own handle! There are two Scotts on here...I think I was first!
Pay cash for a house , pay cash for stocks and bonds ...
~you've probably lost about the same amount of money ...
Never mind not being to write off losses in residential real estate.
It's funny to even be discussing $500K homes. Before the bubble the median U.S. home was what, $100K? Even in the priciest coastal markets $500K used to be considered "luxury" properties only owned by the very top end of the middle class.
Anchoring bias is amazing, isn't it?
OT: but of some interest, looks like Franken is going to win in MN, should make C-Span much more entertaining
Never mind not being to write off losses in residential real estate.
~~~~
If you have bought a house for the right reasons in the first place you ride it out ...
Trouble is , for retirement you need both to own a home and be invested in stocks and bonds ...
The false "tax advantages" are overly stated because of all the realtor shills running around. Most of them can't spell cd and compounding interest so they push the company tag lines.
"Never mind not being to write off losses in residential real estate.
sunsetbeachguy | 12.21.08 - 12:28 am | #"
Good point, sunsetbeachguy. The recent change in tax rules allowing the homeowner's income from a short sale write-off to be tax-free is effectively a tax deduction for the loss (available only to those who used very little of their own money to buy/own the house).
Cds are taxable ...LT capital gains, if you can find them, are only taxed upon sale so your gains are compounded ...
Rental Real Estate also has Non cash expense to hide income until sale ...
Having said that I sold all my rental property between 2-4 years ago ... I saw this coming ...
Cds are taxable ...LT capital gains, if you can find them, are only taxed upon sale so your gains are compounded ...
mmckinl | 12.21.08 - 12:35 am | #
Well we were planning to buy another house in a couple of years and needed the money again which is why I didn't put the money into anything risky.
Well we were planning to buy another house in a couple of years and needed the money again which is why I didn't put the money into anything risky.
Pissed Off In California
~~~~
Smart ... I put some of mine into "safe" munis and I am getting trashed.
I figure I'm down about 5% on my stocks and bonds . I liquidated last Friday ...
but there is also a property tax for real estate. This is a tax disadvantage compared to stocks and bonds.
property tax is deductible against income. And 1% pa -- fixed in Prop 13 states -- isn't that big a deal when appreciation is 10%+. Hell, if you can catch 1 refi down 100bps or so you've just eliminated the property tax expense.
On the other hand, we are going to need to find some way to broaden the tax base to pay all of this borrowing off eventually.
Just tax the unimproved value -- ie site value -- of all real estate.
If we did this we could cut or eliminate income taxes, sales taxes, and property taxes on fixed improvements and cars.
This is the bleedingly obvious solution that has been eliminated from the discussion since the neoclassical economists intentionally blurred the difference between land and capital wealth.
The tax deductions for home ownership are discounted into the price of the home. You have to pay more for your home in order to get the tax deduction. Bottom line, there is no tax advantage.
Troy, wouldnt that lead to even more overbuilding/enviromental degradation?
All of this discussion about how consumers need to rebuild their balance sheets. Could someone please explain why? I mean this seriously...why should I care whether consumers have a decent balance sheet....they were the people who got us into this mess in the first place. I care more as to whether government and business has a troubled balace sheet. Consumers deserve what they get...take your punishment and keep spending....that's your job.
the baseline tax deduction when not itemizing is never backed out of the "tax savings" during the sales pitch for housing, either.
yeahbut having the MI deduction gives you the necessary base to pile on everything.
Troy, wouldnt that lead to even more overbuilding/enviromental degradation?
Most certainly... Just look at Hong Kong.
But zoning can still exist with an aggressive LVT scheme.
The problem with our system is that we can take out frustrations against government (vote them out...like the GOP) and business (boycott them....like I do with Wal-Mart), but there are no ways to take out your frustrations against fellow stupid consumers that got us into this mess.
Being born an American really is the human equivalent of winning the lottery. We have squandered our birthright.
The most slaves on our planet in history currently.
Foreign Policy: Error
Silly CRbots, I may be spending one dollar to save forty cents but when those winnings are highly leveraged into a rising RE price, they're multiplied tenfold!!!!!!
Now back to our regularly scheduled pool game
CR, don't forget the irrational and/or unsophisticated buyers. Specious claims about the merits of such incentives have a profound effect on Joe 6-pack.
This is in the same vane as "buy now since mortgage rates are low".
Bottom line, there is no tax advantage.
awgee
~~~
There is on sale, if you have a gain to take advantage of the 250/500 capital gains rule.
Many houses purchased long ago still have advantage with this rule ...
there are no ways to take out your frustrations against fellow stupid consumers that got us into this mess.
Liquidate GM pretty please
~~~~
Government and banks were supposed to be the adults and say NO to people that couldn't pay the money back ... but since it wasn't their money but ours ... that didn't happen.
Good post. This was part of the reason I whimped out of purchasing a house in 2002, and have never bought one since. Doing all the math, I just couldn't understand what kind of tax advantage I would be seeing. The real estate agent and mortgage broker kept coming up with all kinds of wonderful tax savings I would benefit from. Further at the time I was helping a friend redo his just purchase home. And all the minor fixes he was putting in were adding up to a major cost. Plus the 30 year mortgage relationship.
In my opinion, I saved more renting, didn't have to worry about paying for any repairs, and I could move to a new place every 9 months to a year. Plus there was never the 30 year mortgage relationship to endure. Case in point, I rented a four bedroom condo off Clearwater Beach in Fl, and had a couple of roomates. If I bought the place, my costs would have been (after renting out 2 rooms) $2400 a month. Renting a place in the same building (on a higher floor) cost me $1080 a month. And I saved on repair related costs. Within a year I moved to Davis Island in Tampa. Renting cost me $1230. Purchasing would have cost me $2800. Really these were significant savings over a year.
One more thing, SRS is trading below 65. People take note.
"there are no ways to take out your frustrations against fellow stupid consumers that got us into this mess.
Liquidate GM pretty please"
Maybe Jas Jain and I can figure out how to turn parts of the Inland Empire into an above ground nuclear testing site. Hmmm....
Maybe Jas Jain and I can figure out how to turn parts of the Inland Empire into an above ground nuclear testing site. Hmmm....
~~~`
Why waste a good nuke ?
CR: <i>I'm not arguing for or against any particular tax treatment here, I just think when comparing the tax treatment of various assets, maybe we should consider all taxes.</i>
unfrotunately you are arguning asif facts matter to the people with whom you argue.
The de-regulationistas, surrounded by the catastriophic outcome of their policies, are now like some embarrassed toddler standing in a puddle of urine and pointing at the dog. "It was "CRA!" Yeas, except for all the facts. "It was the Clinton '97 cut" Yeah all excett the timing. "It was the GSEs!" Yeah except they were under the exectuive branxch the whole time and that pesky thing wioth "conforming limits kept thwem out until this was baked in.
There will be a steady stream of this crap, which we mus debunk at every opportunity.
The investor may not pay property taxes on his shares of Exxon-Mobil, but that company will pay corporate income taxes.
Then again, it's not clear whose pocket corporate income taxes come out of.
Maybe Jas Jain and I can figure out how to turn parts of the Inland Empire into an above ground nuclear testing site. Hmmm....
Liquidate GM pretty please | 12.21.08 - 1:11 am | #
A while back I had suggested that the upper stretches of Las Vegas be (e.g., Aliente) turned over to Nellis for suburban warfare training. Might as well get some real use out of it.
In my opinion, I saved more renting, didn't have to worry about paying for any repairs, and I could move to a new place every 9 months to a year. Plus there was never the 30 year mortgage relationship to endure.
OTOH, after 30 years your housing expense goes to $0 or thereabouts.
My mom paid off her house in October, so SSA is actually a livable income now.
Granted, if you can save the $5000/yr or whatever and have $300,000 of assets earning 5% then it's a wash.
How about the 1031 property exchange as a tax advantage? Is there any equivalence in the stocks and bond world that small investors have access to?
One more thing, SRS is trading below 65. People take note.
heh, guess I was right about the exit last week on that.
fwiw, it's not that IYR is so high right now it's just the slippage. IYR is still down 50% for the past 3 months...
ULTRASHORT REAL ESTA ETF Chart - Yahoo! Finance
Good Night and Good Luck.
Hot off the press:
"Spending, Home Sales Probably Tumbled:
U.S. Economy Preview"
The contraction in spending during the current downturn is likely to prove more severe than in any downturn since the Great Depression, Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, said in note to clients.
Spending, Home Sales Probably Tumbled: U.S. Economy Preview - Bloomberg.com
Comrade Bear (tj & the bear) writes:
Maybe Jas Jain and I can figure out how to turn parts of the Inland Empire into an above ground nuclear testing site. Hmmm....
Liquidate GM pretty please | 12.21.08 - 1:11 am | #
A while back I had suggested that the upper stretches of Las Vegas be (e.g., Aliente) turned over to Nellis for suburban warfare training. Might as well get some real use out of it.
Comrade Bear (tj & the bear) | 12.21.08 - 1:20 am | #
Gosh, Bear...why would we need to train the military for suburban warfare in the US? Hmmm.....
Bruce Kasman, Captain Obvious
Some data points here in Charlotte. The malls have plenty of cars ... with clogged roads nearby. People feel they need to buy gifts, and are doing it.
But I'm seeing cutbacks in "fluff" spending. Traffic in restaurants and nightclubs is definately down.
Just this week, I went to two small karaoke shows at some local restaurants. The ONLY diners were a handful of karaoke singers. No "off the street" traffic at all buying dinner. I have to think these places will cut waitstaff if this continues.
I'm seeing nightclubs dropping live music nights and using DJs. My nearest "organic food" market is a ghost building after 8PM. They eliminated the cashier at the salad bar.. now you have to carry your salad to the front row of cashiers by the entrance.
I feel like the first leg down has begun. But we're not yet seeing the cutbacks in services that I saw in 1991. (Shorter public library and parks hours, for example.)
We bought a modestly-size house when our incomes were high and paid it off in ten years. In those days, houses were not so severely overpriced here.
These days, we make less than half what we did in our heydays -- but since we make no monthly payment, nor pay any rent, we still live more or less as we did.
Rent on this house, around here, would be close to two grand. Between taxes, insurance, and repair allowance, we're in for maybe $600-$650 a month, averaged out. You can't even rent a studio around here for that
We've been happy with ownership, no question.
Chinese Premier Wen Jiabao, in a surprise visit to a Beijing university, tried reassuring students they would be able to find jobs amid the current global economic woes, and promised more unspecified steps to help the economy.
Rising unemployment has fed Beijing's fears of unrest as forecasts for China's growth next year fall below 8 percent, seen as a minimum needed to create jobs and maintain social stability after years of double-digit expansion.
"Your difficulties are my difficulties, and if you are worried then I am more worried than you," Wen added.
Business finance news - currency market news - online UK currency markets - financial news - Interactive Investor
I'll bet he's worried.
I think that anyone who buys a home as an investment is deluded. You buy because you want to own a home, not because you want to maximize profit, that is, you buy where you want to live as the primary consideration and then you rationalize the rest. Like most everything destined for personal consumption, personal taste takes priority to the practical exclusion of all else.
This supports my theory that foreclosures are good for Federal Tax revenues. I paid about 4/7th less taxes with my house in CA than I do now without it. It's too bad that CA is getting screwed over, but the problem there is that the property taxes are not high enough. They need to be 3-4%, which will keep prices low and affordable. CA will always have the jobs, unlike states like NY.
"Purposeful domestic resistance" would require military to "rapidly determine the parameters defining the legitimate use of military force inside the United States."
A recent report produced by the U.S. Army War Colleges Strategic Institute warns that the United States may experience massive civil unrest in the wake of a series of crises which it has termed "strategic shock."
The report, titled Known Unknowns: Unconventional Strategic Shocks in Defense Strategy Development, also suggests that the military may have to be used to quell domestic disorder.
"Widespread civil violence inside the United States would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security," the report, authored by [Ret.] Lt. Col. Nathan Freir, reads.
Financial Armageddon: A Shock to the System
Far out, do not miss Letterman and Carrey that Ritholz is carrying, stay til end:
Top 10 Things JIM CARREY Would Say Yes To | The Big Picture
C
After the New Year holiday is the Chinese New Year, so that puts the real test of social stability in February...
Protest by suitcase workers sent packing in China
DONGGUAN, China Laid-off migrant worker Chen Li had red scrape marks on his right cheek from a scuffle with riot police outside his factory that went bust this week in southern China.
Now the angry young man is going home early to his village in northern Hubei province for the annual Chinese New Year holiday, where he says he will be bored and idle for a couple of months. It's restless migrants like Chen who are among the biggest worries for Chinese leaders trying to maintain social order during a souring economy.
"I've grown used to living in the city now," said Chen, 25, looking urbane Friday in a new but slightly dusty blue suit. "I just can't stand the country life anymore."
During boom years, workers like Chen would still be toiling on the assembly line, looking forward to banking another month or so of pay before the Chinese New Year, which begins Jan. 26. But this year thousands of factories have gone belly up in Guangdong province the country's main manufacturing hub forcing the migrants to head home early.
With the global economic downturn, Christmas export orders were down for Chinese factories, and more bad economic news has followed. In November, growth in China's factory output fell to its lowest level in nearly seven years. More than 7,000 companies in Guangdong closed down or moved elsewhere in the first nine months of the year, the official China Daily newspaper reported.
For workers like Chen, the chances of finding another job are low. This is the slow season, with Christmas orders already shipped off. A new hiring frenzy normally kicks off after the New Year holiday, when migrants flood back to industrial zones in one of the world's biggest annual human migrations.
Until then, authorities will be under pressure to keep a lid on discontent in villages, where many workers may still be simmering over how their jobs came to a bad end.
It has become common in Guangdong for factory owners to suddenly shut down their cash-strapped plants and disappear without paying laborers.
Yahoo! 404 - Page Not Found
The Fed is now making loans to hedge funds!
FT.com / US / Economy & Fed - Hedge funds gain access to $200bn Fed aid
I'm surprised that this level of desperation isn't spooking the markets.
Is it too obvious to point out that the mortgage interest tax deduction is only worth something if you have a job?
After The Crisis: A Parody of 15 Corporate Logos | Business Pundit
A World Enslaved
There are now more slaves on the planet than at any time in human history. True abolition will elude us until we admit the massive scope of the problem, attack it in all its forms, and empower slaves to help free themselves.
Foreign Policy: Error
FED loan to hedge funds. Is this a hoax or for real?
If you own a $500 thousand home, you probably pay $5 to $10 thousand per year in property taxes. If you own $500 thousand in stocks and bonds, how much do you pay per year in property taxes (just for owning them - not selling them)?
We have just found a way to eliminate the deficit!
Well at least prop taxes are an offset on fed tax liability + a small homestead exemption that lowers the initial prop tax as well.
How about 1031 exchanges? Depreciation?
These factors also weighed in; sucking more investment into real estate than might otherwise be warranted.
There were/are a lot of lousy RE "investors" that had their primary + a little something on the side... another house (which financing was often obtained fraudently by having more than one prop be "owner occupied"), a duplex, 3 unit, or 4 unit. They held/hold on way past party time because they "didn't want to pay taxes" - a lousy 15%. Now the whole deal is/was underwater.
patientrenter wrote, If I want to live in a certain area and type or residence, I must choose between buying, or renting and buying other investments instead. Either way, I will pay the property tax.
That's NOT true.
You can divide the property tax into two components: the part falling on the improvements and the part falling on the land.
The part falling on the land CANNOT be passed onto tenants. Rather, tenants pay the full rental value of the land to the landowner. The landowner pays the property tax (the fraction falling on land) out of the rent.
If you increase the property tax falling on land, the rent is unchanged. The government gets more of the land rent, and the landowner gets less, but the tenant's payment is unchanged.
This fact has been known since Ricardo came up with his law of rent hundreds of years ago.
Bond Girl wrote, indeed, property tax is built into cost of renting
Only the fraction falling on improvements is.
Anonymous wrote, This is somewhat silly thing to say as good portion of property taxes go towards protecting or benefiting said property - police, fire, local streets, courts, services, etc. (The rest is levied because of our dysfunctional school funding system.) If stocks had a habit of catching on fire people would assent to a "property" (asset) tax on them, too.
No, they're levied because the part of property tax that falls on land is the most efficient and equitable tax there is.
Efficient: because the supply of land is fixed, the land tax is nondistorting.
Equitable: the returns to land (sans improvements) are pure economic rent and not the product of the landowner, unlike returns to labor and capital.
History shows that polities that rely on land taxes (and less so on taxes on labor, consumption, and capital) thrive.
"FED loan to hedge funds. Is this a hoax or for real?"
Benny told you a determined government could always create a inflation Well their determined damn it.
That's the beauty of ZIRP - no taxes on the short term treasuries!
Just talking today not reading. Let's not forget the 1031 exchange frenzy as prices increased.
Internal Revenue Code section 1031 - Wikipedia, the free encyclopedia
TRUE, but:
1) The property tax is deductible
2) Gains on sale for primary are exempt if you qualify
3) Gains on sale for like kind investment property are deferred if you qualify
So, the question should be, in the end, which is better?
Be taxed, get the deduction, and pay no capital gains up to X if you are a primary OR buy stocks, and pay cap gains if you profit?
Don't forget discriminatory property tax schemes like Prop 13 in Ca, and SOH in Florida, which encourage misallocation of housing capital. Imagine if your income tax was based on the starting salary for your current job, or tax on dividends was based on the amount at the time the investor bought the stock.
yogurt
The difference between your wage increase and home value increase is, your home does not increase in real wealth value. The real wealth value does not appear until it is sold and real money passes hands. Assessments are guesses not real wealth back value. If you get a wage increase it is real when you get paid. Stock dividends and bonds become real when proceeds are distributed.
Another thing on property taxes is you don't own anything till the mortgage is paid off. You just agree in the loan to be responsible for them.
Property tax.... hmmmm.
If you have to pay tax on the simple act of OWNING property... do you REALLY own it?
What happens when you STOP paying the property tax? EVICTION.
Let's get clear about one thing: nobody OWNS property in this country. Your local government OWNS it. Property tax isn't tax; it's rent.
Have no illusions.
liberal wrote, "History shows that polities that rely on land taxes (and less so on taxes on labor, consumption, and capital) thrive."
Thrive? Define "thrive".
Certainly the moral and ethical basis of those polities don't "thrive". That's because property tax is the LEAST moral tax there is. To be precise, it is a tax with ABSOLUTELY NO moral basis.
If you have to pay someone every month to own something--or they will not let you use it anymore-- YOU DON'T OWN IT. The taxing entity has TAKEN IT FROM YOU and simply letting you use it for as long as you pay tax on it.
Property tax is a tax that makes a mockery of the word "property".
Why not let them invest in other things that might be more productive, like stocks and bonds?
This statement deserves scrutiny.
We really need to redefine investing. Dumping money into existing stock & bond issues hardly seems like investing anymore. Herd behavior or inflation gathering is more apt.
Why not let them invest in other things that might be more productive, like stocks and bonds?
This statement deserves scrutiny.
We really need to redefine investing. Dumping money into existing stock & bond issues hardly seems like investing anymore. Herd behavior or inflation gathering is more apt.
Oops. Sorry for the double post, I don't like to post anonymously.
"Bottom line, there is no tax advantage.
awgee
~~~
There is on sale, if you have a gain to take advantage of the 250/500 capital gains rule.
Many houses purchased long ago still have advantage with this rule ..."
Yes, IF you have a gain, but if you have a loss on the sale of your home, the loss is not deductible, like other capital losses.
There is no tax advantage.
If you have to pay someone every month to own something--or they will not let you use it anymore-- YOU DON'T OWN IT.
Why should anyone get to own the land. They didn't create it. The improvements on land can be owned, but the rent on the land is a fair tax.
Also, if society improves the value of the land (e.g. installs a subway stop nearby), why should the land owner receive a windfall?
Read up on Henry George. He made compelling arguments for land taxes.
And someone wrote that the ability to like kind exchange is a tax advantage. Like kind exchange is applicable ONLY to business property, not your personal residence.
You mean like a business property that's actually an investment and not merely a personal choice between owning and renting? No one tries to draw a distinction between owning a stock and renting one.
sdtfs, no apologies necessary from last night, no offense taken
yogurt
The difference between your wage increase and home value increase is, your home does not increase in real wealth value....
You did not respond to my point, which is that taxing properties with the same market value and imputed or explicit rental income at rates depending on price of acquisition leads to misallocation of capital.
Just as taxing labor based on starting salary with a firm would lead to a misallocation of labor.
Well, I don't think your argument holds water. You pay property tax whether you rent or own. Just becasue you are renting doesn't mean you are not paying the property tax. You may not be writing the check to the county tax dept, but I promise, you are still paying those taxes as a renter.
fIn a quick perusal, I didn't see anybody mention the lack of a capital loss when selling a home for less than you paid for it. That's certainly a disadvantage in these times and has occurred to me!
CR
I'm not arguing for or against any particular tax treatment here, I just think when comparing the tax treatment of various assets, maybe we should consider all taxes.
True ..... but what real estate offered was leverage. Most persons can't buy stocks or bonds with a > 5 to 1 leverage.
The irrationality with respect to home ownership is based on the idea that home values will always go up, as they have historically. We need to get back to the concept that a house is a place to live and if it appreciates it is just a bonus.
I think the current depreciation of homes will stay in the national consciousness for a long time!
My point is to have true value it has to be backed with true wealth. The true wealth can only be created at point of sale. Look at all on a cash basis. Wages are increased and tax increase is immediate. Yes, if you were paid on the hiring wage and not the raise that would be missallocation of taxes. For RE to change in real wealth backed value like a pay increase, where is the increased money in your pocket like a pay raise? I think Prop 13 is basically supporting true wealth backed value.
CR, the two are rather different because you typically own stocks outright. Still, at a typical dividend yield of 2-3%, you might be paying taxes of 0.8% to 1.2% if you are in the higher income bracket and live somewhere like CA which has high state taxes. Not much different than property tax rates in CA.
Now, the big difference is that for stocks you are paying taxes BECAUSE you are receiving income. For owner occupied homes, you generally don't receive any cash income unless you sell. That makes it more like a nondividend yielding stock, or even a zero coupon bond. With corporate zeroes, you have to pay taxes even though you don't receive any cash income. However, zeroes have a definite payout at the end of their term.
"awgee writes:
The tax deductions for home ownership are discounted into the price of the home. You have to pay more for your home in order to get the tax deduction. Bottom line, there is no tax advantage."
Actually, it's worse than that. In a normal market, the people in the highest tax bracket who would buy a certain type of house set the marginal price. This means that other people end up paying more aftertax for the same home. This is made most obvious when you look at a 0% buyer vs an all cash buyer.
"OTOH, after 30 years your housing expense goes to $0 or thereabouts."
No. Maintenance, insurance, property taxes are still there. All of those go up over the years. Property taxes in CA will almost double over the 30 years if home prices rise. Insurance and maintenance will almost triple. Even with the mortgage paid off, the aftertax cost of ownership in 2039 would be higher than in 2008 when you also had a mortgage.
A fairly good calculator on these sorts of things is at Irvine Housing Blog - Irvine Real Estate and Resale Homes
It captures most of the complexities of rent vs own, and gives the cost comparison for the first year.
Comparing a primary residence with stocks and bonds is complicated by the fact that the former provides shelter, emotional, and social status services.
Home buyers need to subtract the value of those services to get net cash flow.
Only somewhat related, but I think the government should levy an additional tax for vacant properties (say, 90 days vacant) on the owner. If that tax is steep enough, owners will have a strong incentive to get people into the homes, which is good for everyone.
Hardly anything here about what this legislation did for investment...skippin ova the question about how smart itwas for the investor. This legislation occurred at a specific time propelled by specific interests who thought they saw the high tech boom fading. You only need to examine the employment in the real estate sector vs it's competitors to see that the US economy turned decidedly Housing-centric after 1997.
..it does suggest a longer than usual recession.
It does.
Also, real estate people never mention the IRS "recapture of depreciation." When you sell the property, all those great deductions are taken back in the form of taxes.
Even most real estate books do not mention that.
One of the most surprising things when I did the detailed analysis was that the cost of owning a home wasn't much of an inflation hedge, even with a fixed rate loan. Why?
Underlying assumptions: 6.5% interest rate mortgage, 30 year fixed loan, 25% federal tax bracket, no state taxes. If you redo this for someone in the top tax bracket and in CA (40% combined marginal rate), the cost increases 3.1% from year 1 to year 2. It rises by over 4% per year near the end of the loan.
Bet you never heard this from a real estate agent.
I think Prop 13 is basically supporting true wealth backed value.
Nonsense. Real wealth means real goods and services. Two identical houses represent the same real wealth and real value of accommodation.
So why should one pay more taxes than the other?
Prop 13 was a Ponzi scheme designed to shift the burden of property taxation away from old buyers to new buyers. It worked as long as property values kept going up. Now that they are falling it will self-destruct.
If the property taxes are presumed to be included in your rent, then so should everything else, including the benefits of the property tax deduction, and the costs of maintenance, etc.
The fact is that this is not true. The cost of rent is based on supply and demand, not the cost of ownership to the landlord. Do you think the landlord is going to let his units go unrented because he can't find a renter who will pay the full cost of his mortgage, property tax, improvements, etc? That's why at some times it's a better deal to rent than to buy, and vice versa. The markets don't work perfectly, and right now renters are not paying the full cost of ownership that landlords are bearing.
Interesting story in this month's GQ magazine about the housing mess in Lake Elsinore area of CA.
"What Happened to the Neighbors?"
Content Not Found: GQ
liberal: I think your argument of tax/cost pass-throughs hinges on the assumption that sellers/owners already charge the maximum price they can extract from buyers/renters, and have to absorb the cost as they cannot hike prices further.
However, this is only true in a monopoly situation, which I don't think is an accurate characterization of most rental markets. In many cases, prices are set in a competitive environment where cost structure is a parameter. When all sellers are exposed to a similarly higher cost structure, prices can indeed rise across the board -- up to the point of what buyers can pay, beyond that you get into "market failure" territory.
I think your argument of tax/cost pass-throughs hinges on the assumption that sellers/owners already charge the maximum price they can extract from buyers/renters, and have to absorb the cost as they cannot hike prices further.
Actually economists agree that taxes cannot be passed on to the renter.
Rents are perfectly free to go below cost basis. Any market rent is better than NO rent (excluding rent-controlled units of course).
"Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground" -- Adam Smith
That's because property tax is the LEAST moral tax there is. To be precise, it is a tax with ABSOLUTELY NO moral basis.
vs.
"In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago. " -- Milton Friedman
Fight!
yogurt
"Nonsense. Real wealth means real goods and services. Two identical houses represent the same real wealth and real value of accommodation."
Not so, when a house goes up in tax value (especially in an out of control false market as some areas have) where is the wealth to back it up? No one deposits money in your savings account do they? leveraging against this perceived value is not wealth but an assumption. The preconceived wealth does not exist unless sold at market price. Consider the state of CA budget woes. They spent this new false property tax income that is now correcting as property values on recent sales fall back to reality of wealth, not excessive leveraged wealth which helped fuel false prices. Think of the "spend it all" policy government has had with the win fall tax income and how much more debt CA would have now with out prop 13. Houses are only worth what some one is willing to pay on the day it sells, not a guesstimate of value. Lots of false assumptions that really have fueled todays mess. Think on a cash basis not a leveraged basis that amplifies false values. Prop 13 is doing it's job with stability that the undisciplined have wrecked the economy.
Prop 13 is doing it's job with stability that the undisciplined have wrecked the economy.
What the hell? Home prices tripled from 1997 to 2007. Some stability.
BTW, I agree that owner-occupants of SFHs should in principle be insulated from rising tax bills. LVT should be applied to commercial, "investment" property, and vacant land.
Home mortgage interest deduction is limited to personal residence and one other property; investment buyers do not benefit. Assuming one even itemizes (not an easy assumption), real estate is a tax net negative.
No, landlords do not have to rent their properties. Landlords who don't get the rent they want can survive on the tax savings for a year (assuming they have other income). That's one of the reasons rents are "sticky" on the down, but not nearly so "sticky" going up.
Rents generally track house prices (Dean Baker's point in arguing that there was a developing bubble in 2002) and both are tied to the income of the community in which the housing is located. Because there's no speculative interest in housing for tenants, real estate bubbles don't generally increase rents, so in bubble markets the cost of buying has far outstripped the cost of renting.
But, as John Gilderbloom found many years ago, rents have nothing to do with vacancy rate (supply and demand). They're most determined by (a)the cost of the alternative, (b) the median income of the community, or what the market will bear, and (c) the professionalization of the rental industry, or price-fixing.
"What the hell? Home prices tripled from 1997 to 2007. Some stability."
So you agree property values have risen out of alignment with income and rents? This is why they are crashing now? The state spent all of this win fall tax increase Actually slowed by Prop 13 lower tax collections. The tax shortage would be far worse with out it now.
I left CA in the 70's when I thought the mother of stupid happened when my house sold for more then double what I paid in less then five years. I have been shaking my head in wonderment since then.
Actually slowed by Prop 13 lower tax collections. The tax shortage would be far worse with out it now.
We wouldn't /have/ a tax shortage with LVT, LOL.
I left CA in the 70's when I thought the mother of stupid happened when my house sold for more then double what I paid in less then five years
In the mid-70s My parents were renting a 3BD in El Cerrito for $300/mo. I remember them looking at houses in the $45K range, which was inline with rents.
The 1970s did feature a wage-price spiral which of course made its way into land values.
Also, the demographic baby boomer wave hit the state in the 1970s, making for a tighter market since there were more 20 and 30yos looking for housing.
The property tax and interest you write off.
Depends how fast it appreciates.
IMO the tax free capital gains is key. Where else can you pocket 1/2m tax and risk free every couple of years. This is what drove the very high end property.
If you are just going to live in it smaller is better, as long as it is in a safe neighborhood.
"By the time you get to your last payment, there is virtually no mortgage interest deduction. The aftertax cost of a 6.5% fixed rate mortgage rises by 2.5% each year initially. It rises by over 3% each year toward the end of the loan (when principal amortization is the fastest).
Underlying assumptions: 6.5% interest rate mortgage, 30 year fixed loan, 25% federal tax bracket, no state taxes. If you redo this for someone in the top tax bracket and in CA (40% combined marginal rate), the cost increases 3.1% from year 1 to year 2. It rises by over 4% per year near the end of the loan."
Sorry, had some other costs in that model besides mortgage. For just the mortgage, it's 0.7% increase initially in the aftertax cost of a fixed rate mortgage with a 40% combined tax rate, but 2.2% toward the end of 30 years. For 25% tax bracket it's a 0.3% increase initially and 1.4% near the end of 30 years.
Troy
The wages did not keep track with the huge price rise in property. That is why the liar loans where used to support false property values. Those who bought and stayed protected by prop 13 are not the defaults now causing the shortage of tax money. The real problem most governments have is does not show respectful discipline with public money. They spent way to much creating a tax void from the bubble bust. Spending is the first problem.
Hmmm.... the matrix on the investment is very different re: owning the home you live in and investing in real estate. In many areas, SoCal, Florida, etc. the cost of ownership was driven up to a point where it made little sense to do either. However, since the prices have come down, that might change. But, if you choose to not own the home you live in, one of the costs needed to be added in for sure is the rent you pay. Truth is that over the long haul very few people are able to save/invest enough to acquire any wealth outside of that forced savings account some people call their home! Take their home equity away from them and they are almost penniless!
Meanwhile back at the ranch, people who know what they are doing are still making money investing in real estate.
How come so many people write about real estate as a tax advantaged investment, and they never mention the tax disadvantage?
....
So true.
This all depends on if you're looking at it as an investor or as a home owner. As an investor, there is no tax disadvantage - your renter pays your mortgage and taxes, and if he wouldn't then you don't invest.
From an investor's point of view, there is no tax disadvantage. That is all.
CR,
With respect to stocks, you're not quite right. Real estate is an important part of the assets of many corporations, so if you own shares in a corporation with real assets the tax is passed on to you. Fixed machinery and inventory (like cars at an auto dealership) are subject to the personal property tax, which as a generalization has comparable rate to the tax on real property. Therefore the personal property tax is also passed on to stockholders in the form of lower earnings.
Mark
Prop 13 is doing it's job with stability that the undisciplined have wrecked the economy.
Prop 13 encouraged excessive local government spending because it allowed existing homeowners to benefit from services which they didn't have to pay for. The cost of the services was passed on to new homeowners who bought at a higher price and paid higher taxes on the same house.
If the cost of services had been borne equally by homeowners, all homeowners would have had an incentive to vote for local governments that spent less money.
As I said, it's an obvious Ponzi scheme which is now collapsing because new buyers no longer pay higher taxes because RE prices are now declining.
Angry Saver wrote: "Why should anyone get to own the land. They didn't create it. The improvements on land can be owned, but the rent on the land is a fair tax."
You make an idiotic argument-- on the one hand you say that "nobody" should own the land... on the other hand you imply that the State should own the land (as that is the taxing authority).
If "nobody" owned the land then there would be no taxes, and we would revert to some sort of state of nature, and concepts of ownership would revert to as they were under the Native Americans, say.
Now that might be interesting. But you clearly are advocating a position that the State should own the land.
If we have learned NOTHING over the last 100 years, it is that the State is the WORST and LEAST RESPONSIBLE owner of anything.
Land ownership is created by the State. If there is no State, there is no land ownership, because there is no authority to enforce it. There was no land ownership in the US prior to European settlement.
Since it is the State itself that has created land titles that allow the owner to collect economic rent from land and to sell the land to someone else, it has every right to tax land.
There is a far stronger case to be made for allowing the State to tax land than to tax labor, which predates the State and is independent of it.
I'd guess the average property tax is around 1% of value per year.
About the same as the average mutual fund fee, isn't it?
Anybody notice Halscan's screwed-up clock over that last hour or so?
The 1997 tax break on selling your home made it possible to sell at a profit and pay no capital gains tax on up to $500,000. The prior law was more generous. Prior to 1997 you could sell at a profit and pay no capital gains tax with no limit on the amount - provided you bought another home of equal or greater value.
The old law created an incentive to reinvest upward. That is, to increase your real estate position. The new law enabled you to sell and either downsize or exit the market without paying tax. The old law also had a small one time provision for retirees selling to avoid tax as well.
So the real benefit of the 1997 law was to extend the existing tax exception to people who sell without repurchasing (but with a limit on the untaxed amount).
The MID was essentially a give-away to coastal bubble markets.
WRONG!
The individual income tax code, SINCE ITS INCEPTION, allowed ALL interest expense of any kind to be deducted.
Over the years, this has been whittled down to the point where mortgage interest is all that's left.
MID is NOT a subsidy.
"As I said, it's an obvious Ponzi scheme which is now collapsing because new buyers no longer pay higher taxes because RE prices are now declining."
The Ponzi scheme is not prop 13 it is government squandering of the bubble tax money. Fair is never a realistic part of life. Fair would be living in a state that requires a balance budget as I do and now I get slammed with $24K (according to Bloomberg a few weeks ago) of new government debt growing everyday, do to others lack of discipline. Is this fair? I don't even live in a state with a housing bubble problem. We will only have a minor correction of 10% at best. Our property tax rate is 2.2% but at the top the average house was less then $200K.
I think you answered your own question in the fact the collapse takes away tax money from false values that where never there. If one can't afford the taxes they should have considered buying less house to begin with. Looks like a lot of people didn't do their responsible accounting before they bought.
Thats the view from here.
Good discussion and thanks for the time.
MID is NOT a subsidy
Yes it is because the income from the asset, i.e. the rental value, is not taxable. Plus capital gains in most cases are not taxable.
If I borrow money to buy stocks the interest is deductible but the dividends and capital gains are taxable.
Property tax in the US is similar to the wealth tax in France. Mind you they have more taxes.
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