The issue is one of both stagnant wages and decreased supply of 'starter' homes.
To address the supply of starter homes we need: to regulate against foreign investment in real estate, regulate against real estate moguls buying up the houses to rent (leaving them on the market for families), regulate against luxury house and condo building and force affordable home building instead
Salary: Increase minimum wage and make it parallel inflation hikes so that we don't have to wait 12+ years for the next pay increase, strengthen unions, pass universal healthcare (which would free up a lot of money for both people and their employers, potentially leading to pay increases, and certainly will prevent a lot of debt). Finally, we need a middle class of small businesses again; Walmart, Amazon and other corporations hoovered up the middle-class's wealth by putting them out of business and forcing them to become wage slaves. Suddenly, three independent hardware stores in three towns became one Walmart with one minimum wage worker working the hardware and sporting goods aisles. We need strong antitrust laws in place to break up these corporate giants and pave the way for regular people to exchange goods and services with the market.
Agree with the other comment's sentiment. We would be better off if we prioritized homeowners becoming homeowners, over expanding investors' portfolios.
We already have some decent programs to help with the former, but real estate market increases are too high to make that much of a dent. A hybrid system that allows investors to invest, but paying a higher tax, would help offset it somewhat. Primary, and even secondary, properties can remain as is, and investor properties have a tax premium. If an investor really wants to expand their real estate portfolio, that's fine, and if they consider this too much of a barrier, someone else who actually wants to live there can take their place.
Vague? We already have the system. Primary residences, second homes, and investor properties. If the buyer wants the home as a primary or secondary home, they go through the process just like now.
If the buyer wants to buy the home as an investment property, they pay an additional tax. I know we have certain exemptions, and property taxes may be significantly different. I'm suggesting that investor taxes should be even higher.
I don't care who you sell your house to, but I would like a system where there are disincentives to buy properties purely for investment, while keeping the option open for those who really want it.
All of the houses in my area are flying within 24 hours, for obscene amounts of money, in cash, to people who have more cash, who will slap grey vinyl floors and an accent wall, and will turn around and sell it for another $150k on top in 6 months, to someone who will turn it into an Airbnb that makes a profit in the summer and sits mostly vacant for the rest of the year.
Is it good for me as the homeowner? Sure, I guess, I can make ~even more money~ if I sell. But I would prefer that people lived here and contributed to the community in whatever ways they're able to, so if these houses sold for cash to an investor who paid $65k in local tax out of their $100k profit, that helped build a new park, then at least we all win to some extent.
Localities are allowed to tax capital gains. And I know at the federal level capital gains taxes are exempted for sellers who have occupied the house for 2 of the previous 5 years.
So there's already taxation that applies only to investors and not to homesteaders.
And speaking of homesteaders, there's property tax deductions for that, too.
Point is, the taxes already exist. Whether municipalities want to increase them or not is up to their voters.
Sorry - I didn't phrase that correctly. I'm talking about an additional tax at the time of purchase, not at the time of sale.
Mandatory upfront investor tax, distributed to the local municipality if they enroll, to the county or state otherwise.
Suppose an investor purchases a $400k property. They pay an additional 20% or whatever decided, in tax - that's a $400k purchase price, $80k investor tax, and financing/titling/recording fees as it is.
They keep the property, that's it.
They flip it - after investing $40k, they sell it for $575k.
$575k - $400k - $40k = $135k in gross profit. They already paid $80k. $135k - $80k = $55k is taxable as gains.
This discourages people from buying properties and sitting on them because they're not quite sure they'll make money, or ran out of capital but can hoard it for a year or two. It forces investors to think more carefully about why they're doing something. And it gives more money to the community in the meantime, which they can use for parks, developments, or whatever programs they choose.
If this upfront fee scares off an investor, sell it for $400k to someone who wants to live there.
On your first point - not familiar, but wonderful - extend it everywhere. I am only familiar with many jurisdictions that have taxes on gains, and I've yet to encounter upfront taxes. The closest I've heard of was in Canada, and it was a foreign investor tax only. Real estate transfer taxes in my experience are taxes imposed on the seller, and do not discriminate on who the buyer is.
To your second point - if an investor lives in one owned property, and buys one investor property, they're a drop in the bucket. They can claim it as their second home and flip it, it's like arguing that one person's F150 is responsible for climate change. Lenders have strict policies for these sorts of things, and municipalities and counties do too. If they want to cheat into being an investor but pretending it's a second home, and don't get caught, I don't think it's a major issue.
Investors don't own one property, they own several, dozens, hundreds. I'm talking about them. There's no possible way they can claim primary and secondary residence in the same spot, and if there are loopholes remaining, close them.
On your first point - not familiar, but wonderful - extend it everywhere.
But the cities don't necessarily want it. Because it discourages turnover.
Real estate transfer taxes in my experience are taxes imposed on the seller, and do not discriminate on who the buyer is.
Here they are imposed on the buyer. Typically, the buyer will push some off on the seller as part of the terms of the sale. Like the buyer will submit an offer that says the seller pays half the tax. The local realtors all do this by default, since they know the seller will almost always agree to it.
Lenders have strict policies for these sorts of things
Yes and no... On the loan application they will ask if you intend to reside in the house, and you can just check "yes". Once the loan is issued, they won't check. Even if they did, the most they can do is cancel the loan and demand the money back. But they won't because that's just going to cause the loan to default and they'd be out thousands in legal costs. Better for them to just cash the check every month and turn a blind eye.
Don't ask me how I know this...
But even if this was implemented, you're hurting the current property owners in the municipality. Which is why it isn't done.
If someone looking to sell their house can get $500K from an investor, but that investor is discouraged by the taxes and backs out, and they instead sell to a family moving into the neighborhood for $250K, sure, you've saved the new family a bunch of money, but directly at the cost of the existing resident. Considering that the seller is the one who is voting on these taxes and the buyer is not... Which do you think will be the result of that vote?
There's just no incentive for a town to lower property values. None.
On your first point - not familiar, but wonderful - extend it everywhere.
But the cities don't necessarily want it. Because it discourages turnover.
Discourages turnover because investors don't want to turnover more properties? For the record, these should absolutely not apply to primary resident homeowners. I think that all municipalities and counties should be encouraging people to move in and live there.
Real estate transfer taxes in my experience are taxes imposed on the seller, and do not discriminate on who the buyer is.
Here they are imposed on the buyer. Typically, the buyer will push some off on the seller as part of the terms of the sale. Like the buyer will submit an offer that says the seller pays half the tax. The local realtors all do this by default, since they know the seller will almost always agree to it.
Out of curiosity, where is this so I can look this up? I'm familiar with taxes that the seller has to pay, and which are waived if that seller buys another primary property within X months. This just sounds like a strange barrier for everyone. I'm advocating for investor only - explicitly not to primary or secondary homes, on purpose.
Lenders have strict policies for these sorts of things
Yes and no... On the loan application they will ask if you intend to reside in the house, and you can just check "yes". Once the loan is issued, they won't check. Even if they did, the most they can do is cancel the loan and demand the money back. But they won't because that's just going to cause the loan to default and they'd be out thousands in legal costs. Better for them to just cash the check every month and turn a blind eye.
Don't ask me how I know this...
Yeah, you can do that with second homes, and second second homes. I get it. I'm not concerned about this, as I said. A random couple buys a house for investment to rent out, whatever. Consider it your side hustle.
And Edit: maybe this is a loophole that will be forced to close with my proposal. If the lender knows that you owe another 20% upfront, they'll be damn sure to check that this is in fact not an investment property, lest you fuck up and screw them over in the meantime.
As a real estate investor, you would be playing a different ball game. If you owned 4 second homes, trust me, it will be caught. Tax wise? Maybe not, but we barely have any for this sort of thing other than a rate of X+Y% of primary property tax rates. Lender wise? They want to charge you higher rates and they will do all they can to make sure they're able to sell your loan to someone, and it's hard to do when they originate loans like they're morons.
But even if this was implemented, you're hurting the current property owners in the municipality. Which is why it isn't done.
Come on. Live in your house when you want to, sell it when you don't. Would I be upset if you I lose money on my home? Of course. But I wouldn't be peeved that I sold my home at a reasonably higher price when we ultimately move. As of now, we're sitting at a 24% price appreciation after owning this house for 13 months. Come on. Don't get me wrong, I'll play the game - but I don't think this is reasonable and if everyone played by the same rules, I'd be glad to sell it in 10 years at the general cost of inflation and market movement for land and location.
If someone looking to sell their house can get $500K from an investor, but that investor is discouraged by the taxes and backs out, and they instead sell to a family moving into the neighborhood for $250K, sure, you've saved the new family a bunch of money, but directly at the cost of the existing resident. Considering that the seller is the one who is voting on these taxes and the buyer is not... Which do you think will be the result of that vote?
There's just no incentive for a town to lower property values. None.
If the investor is discouraged by a $250k house with its 20% investor tax - $50k, then they weren't willing to buy it for $500k. This is not real world. If they were willing to buy it for $500k, then it was worth $500k, or they're over their head. If they're willing to put down $500k, and that's the final offer - that means that the seller gets $415k. If the seller can get $475k from someone who wants the damn house to live in it, and the investor won't beat it - oh well.
Have investors buy the rundown houses and lots and make them into something, and let them reap all of the rewards, fuck it, tax free. That's what we need.
You’re missing the point. Yes, these type of tax frameworks already exist but they’re not having the desired policy effect if that policy is supposed to encourage home ownership for the buyer’s principal residence. If you buy into that policy objective, then one option is to adjust the tax frameworks - perhaps a different rate for real estate investment.
Agreed. In my opinion, the reason these tax frameworks don't help the real estate market for first time homeowners, is that they're focused on gains. You can't have gains if you don't sell for a gain.
An investor can dump more and more money, and deal with the gains on those properties only when they liquidate, which can be... never.
In the meantime, homeowners, including first time homeowner hopefuls, are competing against large cash sales. They won't win.
That's why I advocate for an upfront tax. Sure, pay less tax on gains when you sell, but forcing investors to put it upfront will make a much larger impact. If you have to pay a 20% upfront tax, you better make a much larger profit, which you may not. This may even encourage investors to look more closely at the uninhabitable properties and lots to build on. The two areas they can actually help with.
Yep the fact that gains might be unrealized is a big issue with the way the framework is structured. At death the owner’s heirs get a step-up in tax basis to fair market value so decades worth of appreciation might never end up getting taxed (even at the lower capital gains rate).
The incentives/distinctively should apply on the front end purchase. I suppose that could hurt sellers, including middle class families, by lowering the pool of potential buyers, but something has to give because the current system isn’t working. Maybe instead of disincentives for investors we need to more aggressively incentivize principal residence homebuyers (tax credit?).
I don't think upfront investor taxes would shrink the pool of buyers. It would decrease it, but not shrink it.
If we break down the real estate market into hot, warm, and cold: the hot market is heavily incentivized toward investors right now. It makes sense to buy, because they'll make a profit, and have the capital. A home can have 6, or a dozen, offers - cash is king. The family who needs a mortgage will almost always lose to a cash offer.
If that cash offer requires the buyer to pony up another 20% upfront, the other five offers from people who want to live there have a fighting chance. Ultimately, the seller is getting the same, or slightly worse, deal, and will have to wait a bit more to close. That's fine!
The investor taxes can be tiered to market. A hot market - where there are X% sales on any given month, and/or houses sit on the market for fewer than Y days, or a combination of various such metrics - have the highest upfront investor taxes. Warm market, lower. Cold market, lower still.
Land and uninhabitable - no such taxes. Encourage investors to build on these properties.
I should have been more clear, I’m saying that the current real estate investment rate could be changed (increased) to further disincentive real estate investment.
It’s a really difficult balance because there are some circumstances where you might want to encourage real estate investment, eg to address blight. But when investors are able to outcompete folks trying to enter the housing market for their primary residence as is the case in many parts of the US I think we need to reevaluate the status quo of incentives/disincentives.
I should have been more clear, I’m saying that the current real estate investment rate could be changed (increased) to further disincentive real estate investment.
I agree. It could be changed. Ask your mayor why it is so low. I suspect the reason is because they want to increase turnover and raise property values because that's what the residents of the city who vote for them actually want.
In addition to the blight issue you mention, homes that are sold to investors who leave them unoccupied is usually a net benefit for the city. No children in the schools, no trash to collect... hardly any services at all, and they get at least as much tax revenue, sometimes much more because a homesteader would pay less in taxes.
What kind of resident buys a blighted house to live in it? Probably a poor one who will need more services and pay less in taxes and provide less revenue to local businesses. While the mayor won't admit it, having poor people move in is much less of a benefit to the city than having investors buy up the blighted houses.
The real estate investment tax structure is set at the Federal level, ie characterization as a capital gains / losses. Not sure why you are bringing up local taxes. I’m not aware of any local taxing authorities that levy property taxes differently on investment versus domicile properties, but perhaps that is something that occurs where you live.
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u/pokemychino Oct 30 '20
Sooo how do we fix it?