As the chart above from the Indiana Department of Local Government Finance shows, 74.2% of the total county property tax levy is paid by residential property owners. While the implied argument for economic development as a method of property tax relief is strong as the development of additional businesses would reduce the portion of taxes collected from residential property, one factor that's not so obvious is the built-in landlord subsidy.
According to the 2000 census, there are 29,087 residential units in Floyd County at about 95% occupancy. Those units include single-family homes, trailers, apartments, and any other arrangement of separate living space. Only 68.6% (19,954) of them are owner-occupied, however. That leaves 7,557 of them as rental units. 26% of all housing units in the county are owned by someone other than their residents and are operated as rental businesses.
Why does this matter? Because the current property tax proposal being mulled over by our state legislature seeks to tax rental businesses at a different rate than other businesses. Owner-occupied residential property tax caps would be set at 1%, rentals at 2%, and other businesses at 3%.
It's difficult to exactly calculate how 7,557 rental units are divided up between various properties. One property could be comprised of 30 units while another could be a detached, single-family rental, i.e., one unit. For comparison's sake, let's assume a typical New Albany rental property of four units. 7,557 total rental units with four units per property is equal to 1,889 properties.
With that figure in hand, take into account the median county property value of $104,300. 1,889 properties multiplied by the median value equals $197,022,700 worth of taxable property.
That property, taxed at an as yet unjustified special rate of 2% would lead to $3,940,454 in revenue. If taxed at the same 3% rate as other businesses, however, the revenue would be $5,910,681. That's a difference of $1,970,227- a difference that would be made up by homeowners every year.
How would that affect individual households? Remember, as of the 2000 census, there were 19,954 owner-occupied homes in Floyd County. $1,970,227 divided among 19,954 homes equals $98.74 per homeowner each year. It may not seem like much on its surface, but those interested in fairness should take note. With the owner-occupied residential property tax rate set at 1% and the median home value at $104,300, the typical property tax bill will be $1,043. That means that if our "number of units per property" assumption is anywhere near correct, roughly 10% of every "average homeowner" property tax payment would be going to subsidize area landlords who refuse, via special interest lobbying efforts, to fairly pay the same tax rate as other businesses.
We've already been collectively subsidizing the rental property business for years by allowing owners to pay residential tax rates on their business property and have often been paid back with an alarming lack of property maintenance and the accompanying attraction of the criminal element into our communities. The newest take on property taxes further codifies that subsidy without requiring any additional responsibility from landlords in return for it.
At the very least, the Jim Bakers and Pat Harrisons of the area should be held publicly accountable for such a boondoggle, as should those public officials who would vote in favor of it.
$104,000 value on a rental unit is a stretch. Higher taxes on rentals only means higher rents for everyone. Just like corporations, those taxes are passed on. Why not raise it to 5%. You will have many units unrented and left to decay while lower income families struggle more to pay the higher rent. You guys can't have it both ways. 2% taxes on rentals keeps the rent low, therefore helping lower income families.
ReplyDeleteThe $104K value on a rental property isn't a stretch at all. In fact, rental properties are often inflated in *market* value because of the commercial nature of the property. That wasn't well calculated in the property tax equation until recently.
ReplyDeleteThe market (banks, investors) recognizes the difference between residential property and a business. It treats them with different financial terms. It's funny that you, of all people, would argue in favor of government intervention and against the market.
As has been pointed out numerous times, there are already tax breaks and other incentives in place for those landlords who want to *legitimately* keep rents low on well-maintained properties in order to aid low-income families. Landlords choose not to participate, as they'd be held accountable for rent limits and maintenance, the very things that would entitle them to the tax breaks.
Besides that, rents aren't particularly low right now with the property tax subsidy already in place for years. There is no requirement or mechanism to pass along property tax savings to renters. Lower property taxes do not directly translate to lower rents. Landlords can and do simply choose to pocket the extra money if they wish.
By the same token, to say that higher property taxes automatically lead to higher rents is inaccurate as well. A landlord can choose to pass those costs along or absorb them, as there's no regulation requiring either, and still make a profit. Higher taxes lead to higher rents only if the landlord chooses to make it so. The government is in no way forcing them to raise rents. The government would be forcing them, though, to pay taxes at the same rate as other businesses, which is fair.
Whether units are rented or not has nothing to do with whether they are maintained or "left to decay". There's no direct correlation, as has been proven hundreds of times in neighborhoods throughout the city.
If the same houses were priced for sale at single-family market value rather than multi-unit rental value, more people could afford to buy and maintain homes.
What has happened for decades instead is that the commercial value of rental properties has risen along with rents while poor maintenance has driven residential value down.
Assesments used to be more largely based on the condition of homes. A 1,500 sq. ft. single-family home in poor condition was assessed at roughly the same amount as a 1,500 sq. ft. home cut up into four income producing apartments. Without looking to market value, one would assume that the two similar sized houses in similar condition had the same worth. That's not true according to the market.
By deferring maintenance, a landlord not only saved the maintenance money but also saved themselves tax dollars via lower than usual assessments, all while raising rents over time. Their rental income reflected market value. Their assessments did not.
With assessments now based on actual market value, which includes a property's income producing worth, that trick is more difficult. One of the reasons major landlords are leading this boondoggle is because this double-whammy jig is expiring, as it should have long ago.
If tax dollars are to be used to subsidize housing, we'd be much better served by program(s) that facilitate individual homeownership and maintenance than by subsidizing people who already own multiple properties and often choose to not maintain them, even though they produce more than enough income to do so.
If helping renters is the goal, it makes more sense to give tax breaks directly to the renters themselves, rather than landlords. That would help two ways: by allowing for more saving toward an eventual home purchase and by creating increased competition in the rental market, with landlords competing on price and quality for the same dollars.
"... there are already tax breaks and other incentives in place for those landlords who want to *legitimately* keep rents low on well-maintained properties in order to aid low-income families..."
ReplyDeleteAll true but let's not forget the other tax break that basically has no such restrictions--depreciation. Not that there is anything unethical or illegal about depreciation but, in many cases, that it is why people own rental property in the first place. A landlord can break even on the rent, use the depreciation to help offset taxes on any other current income and then sell the property years later only to have the profit(selling price less purchase price)taxed at the lower capital gains rate.
Again, not anything illegal about any of this, just that a lot of people don't understand how this works.
The idea that landlords want a 2% tax cap to keep rents affordable for low-income folks is laughable. Landlords want the tax cap to maintain inflated profit levels.
ReplyDeleteThe idea that large numbers of rental units will sit vacant is also disingenuous. Why would a property owner let a unit sit vacant by pricing the rent out of the market? Why not take less profit or sell the property?
As bluegill alluded, the real problem here is that the slowing real estate market and years of “deferred maintenance” have made it difficult to sell unprofitable rental properties at inflated prices.
The only property tax “crisis” for landlords is that they can’t get rich quick off of property investments anymore. How sad.
Keep preaching, I think I almost have it. Higher taxes are good. Open markets are bad. Making a profit is wrong and those that wish to profit quickly are taking advantage of others or the system. Landlords are scum because they won't maintain their property and their tennants have no choice but to continue to live in these deplorable conditions. How did I do? Oh did someone mention giving tax breaks to those that really don't pay any taxes so they can save it to buy their own property?
ReplyDeleteHow did you do? You failed to address any of the points raised in opposition to your first comment. I’ll do you the courtesy of attempting to address yours.
ReplyDelete>Higher taxes are good.
No one has stated that on this thread. I think the general sentiment is giving landlords special favors from the government via a tax break is unjustified. I think we would all agree that an efficient, effective local government is the goal – sometimes that requires higher taxes, sometimes it doesn’t. What it doesn’t justify is a government handout to landlords.
>Open markets are bad.
If you are for open markets, then why do support an unjustified subsidy for landlords? Shouldn’t they be taxed the same as any other business to level the playing field?
>Making a profit is wrong and those that wish to profit quickly are taking advantage of others or the system.
No one is saying that profits – even quick profits- are wrong. It is wrong, in my opinion, to starve local government and beg for special treatment to protect big, quick profits and pretend like you are doing it to help low income folks.
>Landlords are scum because…
I’m not sure where you live, Daniel, but come into the city, where most of the bloggers live, and you will see the impact of slumlords. As for tenants, most folks have at least some responsibility for the conditions where the live, I’ll give you that, but the tenants certainly aren’t the ones on the strong end of the power relationship. Irresponsible landlords, including some of the very same people clamoring for a tax break, have harmed everyone in this city (including you), not just tenants.
>Paying taxes
Do you know any who doesn’t pay taxes? None at all? Where are all of these people? I know that you and I are going to have to pay a lot more in locality and sales taxes to fund a tax break for landlords looking to protect their profits – not to mention the intangible costs that result from underfunded city government.
Please forgive me for butchering the most truthful advertising lines ever written(IMHO) but here goes:
ReplyDeleteA closed mind is a terrible thing to waste.
Maybe we need to look at this from a differing perspective.
ReplyDeleteFirst, higher taxes. One popular talk show host makes the claim that the more you decrease the tax rate, the higher the income the government receives. Let's cut the tax rate to 0 and the government coffers will really overflow!
Let's assume that all profit is good. It is a dog eat dog world out there and the more money you make the more moral you are. This means that you need to do everything you can to squeeze every nickel from every person that you can. It's getting tiresome worrying about fairness so let's not worry about that.
All landlords are great, upstanding citizens. The decay of the buildings is not the fault of negligent landlords it's the fault of the tenants who are too poor to live in homes that they have purchased. Besides, they will appreciate the coldness in their homes when it's hot this summer.
Bluegill,
ReplyDeleteVery informative, thank you.
Daniel,
Keep on protecting the scumbag absentee landlords who are destroying our neighborhoods with their neglected and deplorable properties. Sleep well, thank God you have your strong Christian Values.
Careful, Chris. Daniel might be a stalking horse for Pat Harrison and the realtor's group.
ReplyDeleteChristopher, you may be new here, but I have said before that unscrupulous landlords should be fined or have liens placed against their property. It just seems that all the bloggers on here criminalize and put into the same basket all landlords and multiple property owners. I am a low tax, small government guy. I also sleep well each night.
ReplyDeleteRoger - I am not affilliated with Pat, but she did advise me to get an all brick box as opposed to a vinyl one for investment reasons. :)
ReplyDeleteDaniel,
ReplyDeleteYour response to me further illustrates how uninformed you can be, and how you manage to make assumptions. I am by no means "new" to here.
If you had information or education as to the person(s) you are making such assumptions about regarding our classification of slumlords and landlords together in pot, you would rapidly learn that in 99% percent of all statements made by regarding slumlords and landlords I add a disclaimer stating there is a difference between the two.
The primary difference is this, Macro communities in this city do not notice the landlords, or their properties. Notice is drawn to those who neglect their responsibilities, neglect their properties, and ignore the concerns of surrounding residents.
Please allow me one more indulgence, but in my "new" status, I recall perhaps a month or more ago we had a similar conversation where you had stated your stance AGAINST increased fines, penalties, leins and fees for slumlords as it represents increased taxes, increased governmental employees.
My screen name may have changed to more accurately reflect my real name, my photo my have been changed, but my memory of previous conversations has not changed, nor has my stances. I know that may seem a bit to, how did you put it, along the lines on Mondale and Clinton, but I stick to my convictions, and my convictions are based on real world experience, and not limbaughish elitism, as it would appear from my exposure to your statements have illustrated you as being.
Perhaps we should just agree to disagree and leave it at that.
We can agree to disagree, but one last clarification please. I have never skirted fines or penalties for those that do not maintain their property. I wrote a comment only this week in a conversation with Roger about my differences with Rush and his elitism. Forgive me for the assumption that you are new, but the Rush jabs are stale. I too am firm in my convictions - they just aren't on the same side of the aisle as Mondale and Clinton.
ReplyDeleteA point of clarity for Iamhoosier:
ReplyDeleteThere are rigid federal depreciation guidelines for rental properties. Residential property is depreciated over 27.5 years and commercial rental property 39 years. The basis for computing any capital gains is the purchase price plus any capital improvements less all depreciation deducted up to the date of sale. That figure is your adjusted basis, therefore the difference between your selling price and adjusted basis is your capital gain.
Charlie,
ReplyDeleteThanks for the clarification. I am aware of these but was trying to be brief. You did an excellent job of condensing this, much better than I could have.
Just so there are no misunderstandings, I state again that there is nothing illegal or even necessarily unethical about this topic. There just seems to be a general lack of knowledge. My general point is, if landlords can get get the tax benefits of a "regular" business, perhaps they should be subject to the same laws as "regular" businesses. Licences, tax rates, inspections, etc.
Thanks again.
Mark
Does anyone else here own any rental property?
ReplyDeleteI would like to clarify my comments and give kudos to the good guys.
ReplyDeleteWe have a lot of good landlords in New Albany, including some that are very active in community organizations and revitalization activities. These folks may think that a special property tax cap for rental property is justified, and they probably have some cogent arguments in support.
The good guy landlords aren't the problem, however, and they certainly aren't the ones giving a disingenuous story about their inability to provide "affordable housing" to struggling families.