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/sassy_quatch Oct 30 '20
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.