Comment by Xylakant
9 hours ago
A major problem with property taxes on owner-occupied housing is that the value the owner derives from the house is not dependent on the resale value of the house. An owner occupied house is not primarily a financial investment in most cases. Any increase in housing value (and thus property taxes) is mostly an increase in the cost of living. Any gain in value cannot easily be realized since it’s not a liquid asset. This leads to a fear of being driven out just because the value of the surrounding neighborhood rises doesn’t mean that the owner’s income rises in lockstep.
One way out could be to tax the value gain at the time of sale, or when the house gets rented out, thus no longer being “owner occupied”.
A major problem with decoupling property taxes on owner-occupied housing from market prices is that it removes the biggest incentive for a homeowner to vote for policies that keep the local real estate market in check. An owner occupied house in a desirable area where there is no disincentive to politically engineering a supply shortage becomes a financial investment. Any increase in housing value becomes profit for the owner (or their descendants). This leads to supply restrictions and escalating prices and an increasingly unhealthy society as the young and the poorer are pushed out of the city, county, or even state.
This is essentially what has happened in coastal California over the last 60 years.
Why shouldnt coastal property be crazy expensive? It's the most scarce land there is.
The land should be expensive, the housing doesn’t need to be.
With different policy, there could be more housing built on the same land. The most scarce land there is shouldn’t be predominantly zoned for only low density single family homes.
We could easily build apartments on the coast in CA and then non multi millionaires might be able to live there. We have decided that only multimillionaires deserve to own a coastal house by restricting zoning in the coast so heavily
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If those places became worse places to live as a result, wouldn't that drive property values down?
According to the massive drop of properly value near a certain Tenderloin quarter, yes.
This conveniently ignores all the gains in property value which they can benefit from by refinancing, selling or renting. If they don’t want to pay property taxes on higher values, and don’t care about the value, then we have a simple solution:
Freeze the property taxes and let the government take the entire value gain in the house when its sold.
> Freeze the property taxes and let the government take the entire value gain in the house when its sold.
I find this so funny, it completely takes the wind out of the sails of the parent comment's argument.
People really really want to have their cake and eat it too, and it's very difficult to convince them that it's not the natural way of things.
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> value the owner derives from the house is not dependent on the resale value of the house
Value is always relative - even if the experience hasn't changed, the rising house price does mean that same experience is being value more highly relative to other opportunities. (In most cases this is because the experience actually has changed: if your neighborhood gets nicer, you are indeed benefitting!)
The bigger fallacy in rising property taxes is that civic services don't necessarily get better or more expensive just because property rates rise. And the bigger unfairness is that homeowners with rising values but not rising income don't always have efficient access to the equity of their homes.
A fair property tax regime would avoid presuming budget increases just due to rising value of housing stock, and might subsidize HELOCs or similar structures for folks who need to access property value to pay taxes.
> One way out could be to tax the value gain at the time of sale, or when the house gets rented out, thus no longer being “owner occupied”.
My local government put exactly this on the ballot: a small percentage transfer tax on the sale price of the home, which would offset some of the costs we currently pay in ad valorem property taxes.
The local real estate community had a meltdown and poured hundreds of thousands of dollars into defeating it, which my neighbors obliged and did.
I think many people would have a hard time believing that a new tax in one area would be offset by lowering taxes in another. Even if they did reduce property taxes shortly after passage, many people would assume they will raise them again later on.
If it wasn’t combined in the same bill, the people will just have two taxes going forward. Effectively every “temporary” tax becomes a permanent tax. During the last local election, our city council was asking people to vote to replace an expiring tax with one at a lower rate and trying to sell it as voting for this reduces your tax.
>> One way out could be to tax the value gain at the time of sale, or when the house gets rented out, thus no longer being “owner occupied”.
>My local government put exactly this on the ballot: a small percentage transfer tax on the sale price of the home,
First comment suggests taxing the gain (income tax), while second comment suggests a tax on sale price (gross receipts tax). Two very different things.
While I grant you that they are two different things, two-thirds of the average sale price in my area is from gains in value accrued over the time the home was occupied prior to sale, almost all of which is currently untaxed.
I own a home in Berkeley which loves transfer taxes. They’re creative about it though they tax at different rates based on the home sales price. Starting 1/1/27 the transfer tax goes from 2.5% to 3.5% based on the selling price of the home.
It’s been attractive to voters since most homes sell in the first tier.
You can reclaim some of the transfer tax by performing seismic upgrades which is actually something I support in a town with some houses that can be 100 years old.
The problem with transfer taxes is they bolt you to the place.
That is true, but on the other hand if you had to pay a hefty yearly property or wealth tax you might not be able to afford it in the sense that your wealth is bound up in the house.
The counter is of course that when you buy a house you should make sure you have enough income and/or liquid wealth so that you can pay the taxes. And if not, move to a smaller house. Of course, opponents of such taxation will then roll out all kinds of grannies living in mansions on meager pensions. Then again, is it fair that this prices out younger people from the property market?
As difficult as they are, I do think we'll need some form of wealth taxation in order to put a brake on spiraling inequality. Yes, call me a fan of Piketty if you want.
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It just becomes part of the sale price
The issue with that is the disincentive to sell (or buy), which leads a lot of people to stay put in their oversized home during retirement, for example.
In the UK, 'stamp duty' is something that buyers pay (as opposed to sellers), but sellers also have to buy, so everyone pays to move and everyone stays put to avoid paying.
(And of course no one builds, which is the biggest issue).
I'd say it's OK to defer your property taxes until you sell (or die), but it shouldn't be the default, only something you apply for if you're in a vulnerable position.
I think it's a great idea to let land taxes create the incentives to build efficiently.
In Austria it is even worse. The stamp duty is only for literally buying the house in your name. Thus all sufficiently expensive real estate is wrapped in shell companies where the transfer is untaxed.
The result - stamp duty is exclusively paid by middle class people actually buying homes, never by the rentier class. They already used the money up front to buy the votes for this law apparently
Except they don't, taxing single house owner is just cost of living increase any time area gets gentrified or more desirable
It's basically excuse to get rid of poor that made a mistake of buying a house in area that turned more expensive 2 decades after.
Tax anything after first house, sure, but taxing house by value is terrible idea that never actually worked in a way proponents are saying it would
the incentive is if they sell they realize their gains and are left much richer
"the value the owner derives from the house is not dependent on the resale value of the house"
An owner can derive value from the house in one of three ways:
A) Occupy the whole place.
B) Receive rent from a tenant.
C) Something in between (e.g. airbnb one room).
When property prices double, it's likely that rents roughly double. This may not increase the value the owner can derive from (A) but it will sure change the value they can derive from (B).
So they might decide to switch from living in the place to renting it out. If they don't decide to switch, then it indicates the value they derive from living in the property has either gone up, or it was always way higher than the market rent.
It seems like market rent is a reasonable benchmark to use to calculate property taxes, and property value is a reasonable proxy for market rent.
> A major problem with property taxes on owner-occupied housing is that the value the owner derives from the house is not dependent on the resale value of the house
Your better believe it is when it comes time to sell.
Or would owners not mind having 0% property taxes in return for the state taking all gains at sale time
> the value the owner derives from the house is not dependent on the resale value of the house
It often is, instead. Eg the resale value of my flat increased because the area where I live became a better place.
What they mean is the day-to-day "value" of having a roof over your head, in contrast to your ability to make money by selling.
If the area around you is improving substantially, then yes that day-to-day value could be improved by better local shops, maybe a closer office building, nicer parks, etc. Generally stuff like that does not happen quickly though, and really big changes like magically teleporting from boring middle of nowhere to a vibrant cultural downtown don't happen at all.
> Any gain in value cannot easily be realized since it’s not a liquid asset.
Reverse mortgage
"Oh no, someone's given me an extra $500k for doing nothing which I'll get when I (or my kids) sell my house, how terrible"
But they didn’t do nothing. They put up capital for a resource. Generally more capital than anything else until late in career.
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Exactly. Surely the finance industry can come up with a product that automates this so you automatically sell them a tiny slice of your home to make up the property taxes without it affecting your cash flows.
The private finance industry need not be involved.
Just have government allow taxes to be deferred until time of sale with interest pinned to the cost of borrowing for government. That already exists where I live for people over the age of 65. The government can still get the revenue for free via borrowing and the payback is more or less guaranteed.
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I believe you can get a reverse mortgage line of credit that allows you to take out money as needed. That is, a reverse mortgage doesn't have to be a predetermined lump sum or monthly payout.
This doesn't totally automate it, but it takes away the need to manage the proceeds from a reverse mortgage between the time you receive a payout and the time you pay your taxes.
Or just loosen supply side restrictions so much that houses typically don’t go up in value.
It’s really hard to loosen supply side restrictions on “this somehow became a hip neighborhood.” You can in general make more housing available, but not prevent rising prices in specific neighborhoods.
You absolutely can prevent a "hip neighborhood" from becoming the equivalent of a short squeeze. Prices are not only signals of current scarcity, but also future scarcity. Once you've established that any increase in property value will lead to an influx of capital, followed by a swift increase of supply, every increase will partially suffocate itself.
Not everyone needs to live in a hip neighbourhood?
My intuition agrees with the supply side argument. Also higher interest rates to reduce demand? Isn't this how we got here, to these very high house prices worldwide, by a combination of the two? Taxes seem a second order effect here at best.
Of course, the people who already own land in the now-hip neighborhood either don't want it to change and grow at all, or they want the price to go up as much as possible so they can cash out. The existing owner class never have an incentive for ownership to be affordable...
The funny thing about land and population growth is that land doesn’t. It’s fixed.
Only in the most literal sense. In a far more accurate sense what we are talking about is land where people want to live and that does grow, more or less, with population growth. It's only a handful of cities with geography that makes desirable land fixed.
and population in developed world is also no longer growing
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The premise of real estate (above survival) is living somewhere other people don’t.
That's basic Econ101: households optimize for (subjective) utility, not for profit on some balance sheet. Taxing households for non-realized gains doesn't take into account liquidity nor the (subjective) negative utility and opportunity cost of selling your home and moving away.
I disagree. In my country we are currently in a inheritance boom. Everyone who has parents is getting free money.
This will drive rent up, punishing people who lack the credit to purchase.
> One way out could be to tax the value gain at the time of sale
Stamp duty in the UK, horrendous tax. It's better than nothing at offsetting the unearned increase in house (land) value, but far worse than a regular tax.
If you live somewhere for 10 years, then move, then repeat for 40 years, you pay far more than if you never move. This encourages people to live in less suitable houses for longer.
As to your worry about land values increasing -- the owner is deriving benefit. The higher the land value is, the more benefit the owner gets from the land.
> If you live somewhere for 10 years, then move, then repeat for 40 years, you pay far more than if you never move.
This sounds like a problem with the way the particular tax is written, not with the idea of taxing housing gains at the time of sale.
> The higher the land value is, the more benefit the owner gets from the land.
What benefit does a homeowner derive from increased land value before selling?
Stamp duty doesn't tax gains. It's a tax on buyers, not sellers.
It's absolute insanity
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The increased land value is because the land is more desirable. If I buy some land next to a rubbish dump, it's cheap because living there is terrible. If the dump is then closed my land improves in value, and I derive value from that.
Likewise if I buy somewhere cheap in a backwater town, and the town becomes more desirable because there are better employment opportunities, better shops, better amenities, all of which serve to mean people will pay more for the land, then I benefit from that immediately.
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> One way out could be to tax the value gain at the time of sale
This is how it works for sales in Sweden, via the so called "reavinstskatt", or profit realisation tax. Funnily enough, it is mostly applied to individuals in practice. To avoid the taxation, companies package properties in subsidiaries, which can then be sold and traded like any other stock. The tax is then postponed until the de jure sale of the property, which never occurs. Individuals are not eligible because the loophole is closed if the legal owner also occupies the property they own.
This sounds like a plan to make rented properties a more liquid asset and make rent cheaper. Seems like a sound idea to me.
> One way out could be to tax the value gain at the time of sale, or when the house gets rented out, thus no longer being “owner occupied”.
Forcing renters and buyers to pay for the local services instead of property owners seems extremely unfair.
> Any increase in housing value (and thus property taxes) is mostly an increase in the cost of living.
So? If the property values go up then cost of living is going up for renters too. Why should property owners be shielded from this by imposing local service costs on renters who generally have even lower incomes than owners.