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December 17, 2008


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Umm, since it wasn't obvious to Marotta, the rule was changed because people were gaming the residency rule to convert vacation properties into primary residences in order to gain the tax break on their sale. (Recall, prior to 1997 this tax break didn't exist -- to avoid the capital gains you either had to roll the money over into a new house or take a limited once in a lifetime tax exemption.) I have a tough time seeing this as an unfair rule. I mean if the tax break is framed as being about your primary residence, then how is this unfair? By the way, the rule, as I understand it, only impacts years after 2008 where the vacation home wasn't your primary residence. In other words, all years prior to 2008 where it wasn't your primary residence don't factor into the pro-ration. Of course, double check me on that one, but I think that's the case.

I may agree with Marotta's view that homes shouldn't suffer capital gains given how little (aside from this bubble period) of the appreciation is due to anything other than inflation. But that's for a different day. You would think an asset management group could get passed their ideological commitments a bit and do some better analysis. And that first sentence, my goodness! I see Marotta is back to its old style posts that seem only to convince people to never put their money with them. Maybe a little less flamethrower and a bit more analysis? The first sentence is ridiculous. Unless the reason you were owning the vacation property was to flip it for investment purposes AND you were planning to game the system by moving into it temporarily and claiming it as your primary residence before you sold it, I wouldn't worry terribly that now it is untenable to own two homes. Goodness grief. FMF, put me back in the camp of questioning why you let these people guest post again!

This just kills me!

My wife and are planning on purchasing a new home in 2009, but keep our old house and rent for a couple of years hoping prices would come back up and then sell for a better return.

We are able to purchase the new home without having to sell first. That gives us more leverage and less complication when purchasing. Now we'll have to sell our house first to avoid this lovely new tax.

This may keep us out of the market in 2009. If we do decide to purchase, it'll force us to put a house on the market that would not have been.

- Craig

"These are the same capital gains that President-elect Obama promised during his campaign to raise from 15% to 28% on the most productive citizens." Productive citizens?! ROFLOL! "Productive citizens" - wow that's a good one. I'd be willing to bet that at least 80% of people with second homes purchased them with no money down liar loans. Give me a break! They're a huge part of the problem!

Being one of the "Productive Citizens" who purchased a vacation home as a future retirement home, I take exception to being taxed on an investment of hard-earned money used to purchase this home. I bought this house when I was paid off on deferred vacation and an employee stock purchase plan after my company was bought by a Fortune 100 company. Instead of throwing it away on vacations and new cars, I put it into a future retirement home. Now, the same Fortune 100 company is shipping my job and my 1300 co-workers jobs to Mexico (thank you NAFTA and President Clinton), so we can join the unemployed next year. I'll still get to pay that extra capital gains tax when I sell my first home because I can't afford the property tax on it anymore after 30 years. Not to worry though, the healthcare coverage that I am losing with my job will be paid for by the rest of the working taxpayers. Maybe a former engineer can get a job paving roads with President Obama's new infrastructure workforce.

FMF said:

What depresses the values on second houses depresses the value of all homes.

As a renter with no hope of buying a home, I gotta ask: exactly how is this a bad thing for renters with no hope of buying a home?

Has anyone noticed that the rules are usually rigged in favor of property owners? (Check the fine print in your zoning and tax laws. Homeowners get (almost)all the tax breaks and the zoning laws are written to protect homeowners, not renters.)

FMF will be tickled to learn that homeowners can take the Michigan Homestead Property Tax Credit (a 'circuit breaker' which rebates a portion of property taxes) on the basis of property taxes BILLED, even if the taxes were not actually PAID.

Is this a great country or what?

"Taxing government-created inflation as so-called gains isn't fair."

So-called gains? You mean the money that otherwise goes into your pocket for you to spend? Gosh, who knew those weren't gains?

(And, um, you realize that inflation affects the value of taxes paid as well as house values?)

Sometimes I think the person who writes these blurbs is convinced that the audience here is actually mentally disabled.

poor boomer - No one was talking about how this would or would not benefit renters with no hope of owning a home. It's probably a good thing for you. Deflated property values will most likely lead to cheaper rent.

Rules that are 'rigged' to favor property owners are usually in place to encourage homeownership because of its stabilizing effect on communities. Government uses incentives to encourage certain behaviors. Although this can be frustrating for those who may not be able to engage in those encouraged behaviors (homeownership in this case), it is not due to some conspiracy aimed at keeping renters poor by favoring homeowners.

Have you ever wondered why people who do not own property can vote to increase property taxes? That doesn't seem fair either, does it?

I definitely don't think we should implement a timocracy. I just think it's absurd when people consider rules only as the rules affect themselves, instead of considering why the rules might have been put in place.

Yes, this is a great country, thanks for asking.

The only point worth discussing in this rant from Marrotta is the fairness of taxing inflation-induced profits as gains.

If we start on the second-home exception, what if my 50-foot yacht appreciates? Surely I shouldn't have to pay tax because I choose to sail a boat instead of buy a second home. And what about my stock sales? Part of that gain is inflation-driven too.

And I assume everyone knows that interest rates are higher during inflationary times - so why are we paying tax on bond and CD interest that is just bringing our purchasing power back up to it's previous value?

Even the non-taxing of profit for a first home, like the deductibility of mortgage interest, is a way to steer social policy - i.e., government desire for high levels of home-ownership.

If the government wants us to own two homes, it will provide a tax incentive.

I agree with some of the other comments - the inflation-induced profits being taxed as capital gains seems ridiculous - irrespective of being applied to houses or other investments.
In my country, houses if sold after 3 years of purchase qualify for long term capital gains rate (20%). The good part is that purchase price is indexed to inflation to arrive at the final capital gains.
However, selling before 3 years makes it short term capital gains, which is taxed as regular income (tax rate 10-30%), and you do not get inflation adjustment.
I feel this approach is fair for home-owners and penalizes "investors" reasonably enough.
I thought tax laws in my country were stupid, but looks like in this case, IRS can learn something...

Folks - this will only apply if you happen to sell your home for cash (i.e. - don't roll it into another home.) If you are looking to just upgrade (or if you are going to buy a second home as a retirement home with no intention of selling it) then it doesn't apply. I will shortly be a second home owner, but will have no intention to sell it as it'll be my little retirement getaway instead of a quick-cash flip. This won't affect me at all. As for my heirs, well, tax laws change yearly; it's kind of naive to think there won't be future rules that change the tax rates. That's one of my biggest arguements in favor of having a portion of your portfolio post-tax; to think that current tax rates and rules surrounding pre-tax investments will never change is also naive.

Poor --

You realize that this is a guest post, right? I didn't say that, the author did.

spivey said:

"Have you ever wondered why people who do not own property can vote to increase property taxes? That doesn't seem fair either, does it?"

Ah, an interesting question. FWIW, I support transparency in property taxation and an explicit pass-through of property taxes to the renter. This would impose an explicit cost on renters when property taxes are increased, and presumably would give renters pause before voting to increase said taxes. The flip side, however, is that property tax cuts would put money in the pockets of renters, something which has never been the case. (Currently, the common conservative tax tradeoff - reducing property taxes and increasing sales taxes - is guaranteed to make every renter worse off. So I enthusiastically welcome any explicit assignment of property taxes to renters.)

This is actually commonplace in commercial properties, where the tenant explicitly pays the property taxes (so-called "triple net" leases)..

In residential, property taxes typically are bundled into or embedded in the rent charged. As a result, while renters might experience a temporary lag between the time property taxes go up and the time their rent goes up, renters never receive in their pockets the savings of property tax cuts.

Note that my solution would resolve the issue of renters getting a free ride by voting for higher property taxes.

Having said that, the sad (for me, anyway) reality is that renters have a much lower voting rate than do homeowners. Basically, renters as a group lag way behind homeowners on a variety of demographics which correlate with voting. (For example, median renter income is <50% of median homeowner income; renters, lacking housing tenure, have much shorter length of residence than do homeowners, etc.) In a census survey I found at work years ago, renters cast approx one-sixth of the votes in 1982 elections, while comprising one-third of the population. So I doubt renters are, to any significant extent, imposing higher property taxes on unwilling homeowners.

Particularly interesting to me is the Michigan nonhomestead tax, which is levied on rental property but not on a homeowner's primary residence. This is a school tax and is 3x the base school tax rate on all property. (So the total school tax rate on rental prop is 3x + 1x = 4x the rate on owner-occupied primary residences.

Since the vast majority of homeowners do not own nonhomestead property, the nonhomestead tax is not levied on their homes, and thus represents free money to homeowners with children in school.

Question for you: Is it fair that homeowners WHO DO NOT OWN NONHOMESTEAD PROPERTY can vote to levy this tax?

Sorry about that, FMF -I was just trying to bat out a quick reply (as I often do; hence frequent typos) and forgot to properly attribute the OP. That is, when I wrote it, I knew the OP was a guest post but my multitasking execution was flawed.

p.s. I also wrote the above rant in reply to spivey; I was careful enough to have checked my reply for errors, and forgot to notice that I had failed to put in a name, which I had intended to add after concluding the rant.

spivey also said:

"Rules that are 'rigged' to favor property owners are usually in place to encourage homeownership because of its stabilizing effect on communities. Government uses incentives to encourage certain behaviors. Although this can be frustrating for those who may not be able to engage in those encouraged behaviors (homeownership in this case), it is not due to some conspiracy aimed at keeping renters poor by favoring homeowners."

Rent control arguably has an even greater stabilizing effect on communities, based on the stories I've heard out of NYC.

How is the "incentive" offered to an affluent person (who has the option of buying or not buying a home) not a penalty to the person who must pay more as a result of lacking similar options?

You are correct that "... it is not due to some conspiracy aimed at keeping renters poor by favoring homeowners" yet it is a penalty with a cost, nonetheless.

It is not about, and never has been about, renters. This country has been all about property owners. That's why, when government effects a "taking" of your property, the Constitution entitles property owners to "just compenmsation" while renters get squat. It's all about homeowners - should the latest bailout have been any surprise??? - and if renters get hosed, that's just collateral damage and tough luck.

p.s. Did you know that this country still has elected public offices which are restricted to property owners?

poor boomer-

I think transparency in property taxation sounds like a good idea.

If property owners were split 50/50 on some tax, the 16% of votes cast by non-property owners could definitely have an impact. At any rate, I am not saying that homeowners are being victimized due to this practice, just that it seems a little odd at face value. As for the "NONHOMESTEAD PROPERTY TAX" you mentioned, I can't speak to its fairness, but it definitely doesn't sound like a good idea to me. It sounds like it would just increase costs for landlords and renters alike and create unnecessary friction in the rental property market. I suppose one could argue that it is unfair because it is a tax imposed on a minority (landlords and renters) by a majority (homeowners with just one home), but I don't know the numbers there and I am sure it varies by location.

As far as incentives go, I did not say that it wasn't effectively a penalty to those who do not have the option to participate. I said that I can understand that it would be frustrating to be unable to engage in the encouraged behavior. It does amount to a penalty to renters, but the net social benefit can still be worth having those rules in place.

I would be interested in reading about rent control's effect in stabilizing communities, but it would be a hard sell to convince me that it is comparable to the positive external effects of homeownership (I might be slightly biased).

I don't understand why a renter is due anything when the government exercises eminent domain. Unless I am mistaken (a distinct possibility), the "just compensation" is only for the land itself, not for the inconvenience of moving and such. So how would renters be entitled to anything in that case?

I was not aware that there are public offices that are restricted to property owners. Where are they?

spivey said:

"If property owners were split 50/50 on some tax, the 16% of votes cast by non-property owners could definitely have an impact."

I think the results depend largely on the nature of the tax and the renter's personal rental experience. For example, I am steadfastly opposed to the nonhomestead tax and cannot think of any scenario under which I would vote for it. (Or, more emphatically, I cannot imagine any scenario under which I would refrain from voting AGAINST it.)

Some renters might think their landlord hosed them, and enjoy the opportunity to 'stick it to' their landlord in the form of higher taxes. Or someone might have a very good deal and specifically NOT want to raise their landlord's taxes.

More transparency and honesty and moderation could only improve the tax issue. It's hard to sympathize at tax time with landlords who stick it to tenants because they can - but it's also hard to NOT sympathize with reasonable landlords.

Another question: As someone who has voted against the nonhomestead tax at every opportunity, should I be excluded from voting on it because I don't own property? If I can't vote on it, how about a rebate for the amount of the tax I paid but didn't get to vote against??

Many Western states have "soil and water conservation districts" (which mostly originated in the Depression era). In Oregon, qualifications for elected board members include owning or managing at least 10 acres of land. That was a surprise to me.

p.s. In NYC, rent control has the perverse effect of stabilizing people for decades because controlled rents over time lag far far below uncontrolled rents. (Imagine staying in an apt 40 years for $150/mo while uncontrolled rents soar to $3000.) Stabilizxing neighborhoods might be a good thing but in NYC it might be too much of a good thing.

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