{"id":5088,"date":"2008-09-18T02:00:36","date_gmt":"2008-09-18T07:00:36","guid":{"rendered":"http:\/\/magic1host.com\/blog\/2008\/09\/18\/the-effects-of-taxation-on-real-estate\/"},"modified":"2008-09-18T02:00:36","modified_gmt":"2008-09-18T07:00:36","slug":"the-effects-of-taxation-on-real-estate","status":"publish","type":"post","link":"https:\/\/magic1host.com\/blog\/?p=5088","title":{"rendered":"The Effects of Taxation on Real Estate"},"content":{"rendered":"
by Rob Viglione<\/div>\n

In order for government to function it must collect taxes. We have multiple levels of government – local, state, and federal – each with its own funding requirements. Tax theory suggests the best way to raise revenue is to levy a broad, uniform, and low rate. Not only that, but taxes should avoid hindering productivity, such as taxing income (especially on a progressive scale), which depresses economic activity and provides incentive for avoidance. As far as real estate<\/a> is concerned, the most relevent taxes fall into two categories: transfer and property taxes. Each has a unique effect on the real estate market, so it’s important to understand the full consequences of policy when making investment decisions.<\/p>\n

Generally speaking, higher taxes mean lower property values. Seems fairly intuitive, but what exactly does this mean for a property investor? The National Association of Realtors (NAR) released a study this May quantifying the impacts of marginal increases in both transfer taxes (taxes on the sale\/disposal of property) and property taxes (assessed as a % of value). Increasing transfer taxes increases the cost of buying, which drives a percentage of potential buyers out of the market. In California, for example, it is estimated that nearly 80,000 potential buyers would be crowded out of the market by a 1% increase in transfer taxes.<\/p>\n

Property taxes are the staple of revenue for local governments, and tend to be the largest non-acquisition cost of ownership. These vary by locality, but in Los Angeles County are 1.25% of assessed property value, charged annually. This translates into hefty recurring bills, especially for new buyers. For instance, 1.25% of $435,000 (the Apr ’08 median home price in Los Angeles County) is $5,438. Per the U.S. Census Bureau’s QuickFacts, 2004 median income for the County was $43,518. Because of the sickly confusing amalgamation of local, sales, state, and federal taxes, let’s just assume a rough 30% net tax on income, which adjusts the median take-home income down to $30,463. On this basis, an inocuous-looking 1.25% property tax translates into 18% of after-tax median income. Granted, income figures were taken from 2004 data and may need upward adjustment, but given modest increases in take home pay over the last four years this is not likely significant.<\/p>\n

It’s possible to calculate the correlation between property taxes and home prices. Using the basic finance tool of discounting cash flows, NAR determined that for every $1K property tax increase there is a corresponding $13K reduction in home values. This means there is a 3% reduction in property values for every 0.23% increase in property taxes for a home priced at the median.<\/p>\n

When times are good, the economy and asset values are soaring, no one seems to care about government spending hikes. All sorts of noble causes are championed by our noble politicians – everything from education at all costs, to healthcare for everyone – but when the economy turns sour and home prices plummet the inevitable consequence is government deficit. To cover deficits governments must increase taxes now or borrow and increase later. This only further hampers economic recovery. From an investor’s perspective, it’s imperative to understand how government cycles of spend, tax, fall-into-deficit, and tax more impact your bottom line. Keep up to date with your state’s and local municipality’s fiscal condition and anticipate changes to tax policies. Staying ahead of the tax game will give you a sharp advantage over your investor peers, and put you well in front of the pack as far as regular home buyers are concerned.<\/p>\n

\n
About the Author:<\/div>\n
Rob Viglione is a author, investment fund manager, and real estate broker. He recently launched Viglione & Partners Assurance Group, L.P., SoCal Real Estate Advisors, Inc.<\/a>, and founded The Freedom Factory<\/a>.<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

In order for government to function it must collect taxes. We have multiple levels of government – local, state, and federal – each with its own funding requirements. Tax theory suggests the best way to raise revenue is to levy a broad, uniform, and low rate. Not only that, but taxes should avoid hindering productivity, such as taxing income (especially on a progressive scale), which depresses economic activity and provides incentive for avoidance. As far as real estate is concerned, the most relevent taxes fall into two categories: transfer and property taxes. Each has a unique effect on the real estate market, so it’s important to understand the full consequences of policy when making investment decisions.<\/p>\n","protected":false},"author":1531,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[77],"class_list":["post-5088","post","type-post","status-publish","format-standard","hentry","category-business","tag-business"],"_links":{"self":[{"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/5088","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=\/wp\/v2\/users\/1531"}],"replies":[{"embeddable":true,"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5088"}],"version-history":[{"count":0,"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=\/wp\/v2\/posts\/5088\/revisions"}],"wp:attachment":[{"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5088"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5088"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/magic1host.com\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5088"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}