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Photo Credit: JD Hancock [1] via Compfight [2]The reason Mitt Romney pays so little income tax is that he makes most of his money from investments. This is supposed to be a way to “incentivize” investment. So he invests in companies that supposedly create jobs and spread the wealth around.
Mitt is most definitely part of the 1%. For the rest of us, our biggest investment is our home. The government gives us a mortgage-interest deduction to help us out, but mortgage interest is a fixed known cost in the equation, our wild card is property taxes- something our government seems to play fast and loose with.
For most Americans- the only long-term investments they make are their home and their retirement accounts. Both are supposedly backed by our government. Mortgages were backed by Fanny Mae and Sallie Mae or FHA and our pensions (unless you worked for Delphi) are backed by the Federal Pension Guarantee fund. Government regulations are all over the place- with rules on 401Ks, IRAs and the mutual funds that much of our retirement planning is predicated on.
But your home is different- it’s the one that is tangible, a direct reflection on your choice of where to live and you are the manager. You decide if it’s time to paint, put new gutters on, how you landscape, if you want to invest in granite counter tops or just use Formica. And here is the rub, at any time, someone hired by the county comes around every few years and decides what the value is and raises or lowers your tax bill totally arbitrarily.
How do I know this? Quite simply- I own four pieces of property and have watched the bills get played with over the years and despite going in to dispute the values last year- end up with mixed-up bills again this year.
Case in point: I bought two virtually identical cottages across the street from my house in 1995 for $19,500 each to try to improve the quality of life on our block. They were owned by a slumlord, whom the city has made very wealthy by overpaying for rent for years on a priority board office in a building he owned on the West Side. He was renting them out as Section 8 homes, I wouldn’t let a junkyard dog sleep in either one when I bought them. When entering for the first time the one my parents now live in (I bought them without inspection) a lump of dirt fell on my hat – when it started moving, I realized that it wasn’t dirt- but cockroaches. The house was so infested I even found them inside the toilet tank. The other house was involved in drug sales- but wasn’t much better. I totally gutted both, put all new everything inside them, and then went to the banks to refinance and get my money back. They’ve been solidly rented ever since.
The tax values on these two homes, despite me telling the county that they are identical- is different. It’s also based on a number pulled out of a hat. It is so confused that they don’t even tax you on “the value” but on a percentage of value. The value goes up and down over time, based on what others in the neighborhood do, based on what you do, based on whim and whimsy.
This is bullcrap. The value of the homes was established when I bought them. What I choose to do with them is none of government’s business. If I fix them up and rent them for more, how is this any different than what Mitt Romney does in buying stock and hoping it goes up? Why does my investment get “appraised” a market value by someone who has no real way of telling what the value is? Concrete numbers like rent received aren’t counted. Concrete numbers like sale price aren’t considered. If you wonder why our housing market started fluctuating like the stock market- it’s because we allowed the banks to change the way they made money from concrete numbers to a numbers game (like a casino would run- where the “house” always makes money- and the irony of that expression is noted).
Banks used to make a majority of their money by lending money to people to invest in their home or business- and they had to hold those notes to get paid. Now, they make their money by investing money that we let them “create” with dubious products that they started selling based on packages of loans that they handed off. Banks no longer had any responsibility to make sure their investments were protected- since they sold off the loan as fast as possible to someone else and moved on to the next loan. Churning mortgages by banks is the same as churning stocks for stockbrokers- who only make money on the transaction- not on the outcomes.
So here I sit in my house. Bought for $14,500 in 1986, across the street from my office, bought for $2,200 and $2,400 in back taxes in 1988 and my two cottages (which I paid too much for)- paying taxes on property that is now worth a lot- according to the tax man, despite being written off by everyone else, including the banks when I bought it. Every property I bought I had to pay cash for, since they were all worth “below” the loan threshold for banks. Yet, here I am being asked to pay $2,000 a year on both my office and my house and $800 a year on each cottage. I am being penalized for investing. Mitt Romney isn’t.
To add insult to injury- the house nearby, which is bigger than mine (it’s 2 stories over the back of the house, while mine isn’t), but the same basic footprint, was sold in foreclosure 3 years ago for $14,000. Not only are their taxes only $600 a year, they haven’t paid them and have been the frequent entertainers of police, fire and truancy officers. [3]
How much money could we save if we didn’t have to pay for “re-appraisals” every so many years- and based tax value only on the purchase price by the owner? How about treating the real estate investor the same way we treat the stock market investor? It’s time for real-market valuation system and taking the arbitrary valuation of property out of the equation. Never mind the effect this has on seniors on fixed incomes (where we have to put “homestead” protections in place).
Why shouldn’t those who buy low and don’t sell, be allowed to profit from their investment in the community? Why do we abate property taxes for businesses that are “going to invest” but not for those who actually did invest? Considering that my investment in the office building brought jobs to an empty storefront- saved the city from having to tear down another vacant building and turned a shithole into a preservation award winner- why am I getting penalized with a growing tax bill? Consider that the cottages have been rented to people who have jobs instead of being on welfare or either on the way in or our of prison, haven’t I added value to the community and deserve to be rewarded instead of taxed? My home had sat on the market for over 2 years, starting at $22,900 and sold for $14,500 because the banks wouldn’t lend (despite all the BS about Community Reinvestment Act – CRA lending protocols), and yet 25 years later, because of banks’ new found freedoms of not having to be held accountable for loans- the nearby home sold for $500 less- despite being worth much more?
How come on almost every other level, investment isn’t penalized, but on property, it is? If there was a reason for a tea party revolt over taxation without representation, shouldn’t this be the case? My home was valued at one time by a bank at $130,000, but now according to Zillow [4] it’s only worth about $62,300 [5] and interestingly enough, Zillow is what the government is turning to for valuations for the “Making Home Affordable [6]” program- not our local tax man’s appraisal.
There is only one honest way to value real estate, by the purchase price. Do you agree?
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David,
Great article. I agree completely that there has to be a better way to determine property values. Like you, I believe that way should be set by the owner, at the price bought and at that value until it changes ownership.
California has something close, prop 13, that starts the taxable value at the sale price and then caps the annual increase in value to something like 2% or inflation, whichever is less. That value and cap on growth holds until the property is sold and the value is reset at the new sale price.
Besides eliminating the appraisal update expenses, think of all the other programs that could be eliminated. The Board of revision, the homestead tax exemption offices, and all kinds of other tax rate reduction programs designed to help people pay taxes who have been lived in the same house for decades.
Should homeowners live in the property a long time, they would no longer have to wonder what their taxable value and thus taxes would be based off of. Or even that they taxable value could be 3 or 4 times what they were when they bought the house. Taxable value would be simple and predictable. If you buy a brand new expensive home, you would know exactly how much your taxes would be calculated and how much you would owe.
Unfortunately, this will would never get approved in Ohio for the simple reason that it just makes too much sense.
?“This is bullcrap. The value of the homes was established when I bought them. What I choose to do with them is none of government’s business.”
David, I agree with this point entirely! The only justifiable reason for raising property taxes is to reflect the effect of inflation on the value of the dollar. Increasing the property’s assessed value because the owner has made improvements on it is penalizing the owner for doing good. Likewise, if someone buys an identical piece of property and lets it deteriorate, they are essentially rewarded with lower property taxes when the appraised value is lowered. A property’s value should be re-assessed only at the point of each sale, for each new owner.
Just being a Devil’s advocate here, but I don’t think sale prices can be the only determining factor when establishing property tax rates. What if you’re my best friend or my brother, so I sell you my house for $5. Would the $5 purchase price really represent an accurate and reasonable taxable value? Of course the example is extreme, but I think it illustrates why periodic reappraisals are necessary and why property tax rates aren’t based on sale prices.
@Diane- say I bought my house for $100,000 and then sold it for $5- I would declare a loss on my taxes- my brother would record a gift of $99,995 and pay taxes on that.
Sure, his property taxes would be lowered- but, most people can’t afford to play games like this. Also- he’d not be able to insure it for more than $5. So if it burned down- he gets $5.
We could also have a alternate minimum tax- based on the average of the neighborhood valuations to stop things like this- based on actual selling prices- and comparable square footage.
Real estate inflation and subsequent increases in property valuations have proven that, over time, property taxes assessed will exceed the price paid for the real estate.
The villan here shouldn’t be Mitt Romney. The man behind the curtain is Karl Keith.
This is from James Howard Kunstler along the same lines: Our system of property taxes punishes anyone who puts up a decent building made of durable materials. It rewards those who let existing buildings go to hell. It favors speculators who sit on vacant or underutilized land in the hearts of our cities and towns. In doing so it creates an artificial scarcity of land on the free market, which drives up the price of land in general, and encourages ever more scattered development, i.e., suburban sprawl. In tandem with zoning, the taxing of buildings rather than land itself promotes such wasteful practices as putting up cheap one-story burger joints in huge parking lots on prime city land. It is one of the biggest impediments to the free market creation of affordable housing. As a consequence of all these things it is a drag on economic productivity and employment. This happens because we tax buildings much more heavily than the land under them. These buildings are visited by an official assessor who determines their value. The higher the buildings value, the higher the tax. Under this system, a rational person has every reason to put up crappy buildings that will not be highly assessed, or he has every reason to let his property run down, or build nothing at all. This is a major reason for the current desolation of American towns and cities. The alternative to this is to tax land itself and not the buildings on it. The criteria for assessing the value of land minus buildings is based on its location or site. If it is one block away from Main Street, for instance, it is considered to have high site value because it is very close to other things that people like to be near, public utilities, the post office, civic amenities such as parks, museums, libraries, schools, other businesses and other services, and so on. The theory behind this is that in human society land derives value from both explicit public investment (sewers, water lines, streets), and from the aggregate of private human activities that… Read more »
David E – Comparing Romney’y income taxes to your property taxes is ludicrous. There’s just no comparison between the two. One is a tax on income recognized with the asset is sold or pays dividends. The other is a “wealth tax” paid on the value of certain assets – namely, real estate. I’m sure you’re not aware that at one time Ohio actually had an “intangibles tax” that you had to pay on the value of your investments including stocks, bonds, CDs and savings accounts. If my memory is correct, it was phased out in the early to mid-80’s. It was similar in principle (and practice) to the “Personal Property Tax” that used to be in effect for business assets (you probably never paid this tax since the taxable value of your business assets fell below the taxable threshold). There is a lot more I’d like to write about this subject concerning your post, but I don’t have time right now. What prompted me to post right now is your ridiculous response to Diane. It’s a perfect example of you presenting something as fact when you don’t have a clue what you’re talking about. Regarding your first statement – If you bought your house (the one you’re living in) for $100,000 and sold it for $5, you CANNOT declare a loss on your taxes. It’s a personal asset and the IRS does not allow individuals to recognize losses on the sale of personal assets. This holds true for houses, cars, tools, antiques, art, etc. Technically you are supposed to recognize gains on the sale of personal assets (exceptions exist for your primary residence) although most people never do. While you may hold investments (stocks, bonds, rental property, business real estate, etc.) personally, those are considered capital assets for tax purposes. Also, your brother would not “record a gift of $99,995 and pay taxes on that.” If you did “gift” your brother your house, YOU (the giver) would be responsible for any applicable gift taxes. I don’t have time to get into all of the nuances of gift taxation though. Next,… Read more »
I don’t think your statement “he’d not be able to insure it for more than $5” is correct. My husband and I own 3 single family homes. Each has insurance coverage (1 residential policy, 2 commercial polciies) for more than we paid for them. Our coverage is determined by what it would cost to rebuild them at today’s costs. Since this doesn’t include the cost of the land, the gap between price paid and insured value is even greater.
Property tax is the most intrusive tax. For you can never “own” your home. You could pay it off, have all expenses covered in your life and then lose your job and have no income. But the taxman, oh he still cometh and if you cannot pay…………well out of your house you go. It also destroys generational wealth gain. A poor family cannot pass down property they own to other low income earners unless they can sustain the tax payments. If in an area where demand is increasing and property values are soaring, we can tax poorer people right out of their homes.
The question should not be “how to appraise my home”, but how to eliminate property tax altogether.
David, you boast for the programs that property tax fund. You often want them expanded and funded with more money. There will be no elimination or simplification of property tax for any property owner as long as so many “programs” are dependent upon it.
I cannot bring myself to buy a home (residence). The property taxes make me sick. So, I rent. And even though I consciously know that part of my rent is inflated because of taxes, it still makes me feel better not having to pay the taxman directly. It also keeps me living well under my means, so there is that bonus.
I was going to comment about the homeowner’s insurance claim as well, but I don’t think that’s necessary now…