There is a similar problem in California, but it is in regards to the government encouraging everyone, including homeowners not to sell. California homes are assessed at purchase price but the taxable value can only increase at like 1% a year. The result is that over a long period of time, like 30 years, a home's value will be much higher than its assessed value. There are homes in CA right now worth over a million only being taxed at $300K or so.
So rather than downsize into a less spacious and easier to care for condo at $500-$600K, these homeowners are encouraged to stay put and pass the home on to their heirs tax free. Sure, real estate investors are are in the same boat, the longer they hold a property, the lower their taxes will be compared to the home's value over time, unlike the state I live in now, Ohio, which does a major assessment every 6 years and a minor assessment every 3 years based on market value.
This stepped-up tax-basis, in general, thought, applies to all real estate passed on to heirs whether it is an investment or not. Granted, homeowners have the $250K/$500K tax exemption so have more freedom to decide to sell rather than hold on to something to pass on to heirs, but again that is for the average homeowner. Trump, Clinton, Obama, and many other congress critters and rich people are also homeowners and their homes are very expensive. Their gains might far exceed the measly $250/$500K tax exemptions and will also be more inclined to hold on to property to pass on to heirs.
I think this issue is more of an inheritance issue in general rather than something just landlords enjoy. The question is, when a family passes on wealth to the next, how much of that wealth accumulated do you think belongs to the government? If you wanted to argue that at least they should have to recapture depreciation I think you have a solid argument. But if you argue that stepped up tax basis should be removed for landlords, if you fairness is your issue, you need to remove it across the board.
And remember that those landlords all live somewhere, and they don't get to depreciate their primary residences as normal homeowners don't get to do and their primary residences can be passed on tax free to heirs.
Maybe if you put a capital gains exemption on landlords, just like homeowners, say of $250/$500K per sale, that might encourage more landlords to sell. If your goal is to get more homes on to the market, that might be enough to nudge some to sell now that would otherwise hold on until death.
What is your ultimate goal? If we want to make more homes available to homebuyers, we could do one or more of the following:
- Give a 7-day first look period to all homeowners nationwide on all homes on the MLS
- Give landlords a $250/$500K tax exemption on all taxes owed for each sale.
- Allow renters and homeowners to deduct normal living expenses just like a business (this would keep more renters in place and take some pressure off competition for the limited number of homes on the market) and just be fairer overall
- Raise interest rates to slow down the demand of homes
- Give tax incentives to convert vacant commercial buildings into condos
Hi John,
There is a similar problem in California, but it is in regards to the government encouraging everyone, including homeowners not to sell. California homes are assessed at purchase price but the taxable value can only increase at like 1% a year. The result is that over a long period of time, like 30 years, a home's value will be much higher than its assessed value. There are homes in CA right now worth over a million only being taxed at $300K or so.
So rather than downsize into a less spacious and easier to care for condo at $500-$600K, these homeowners are encouraged to stay put and pass the home on to their heirs tax free. Sure, real estate investors are are in the same boat, the longer they hold a property, the lower their taxes will be compared to the home's value over time, unlike the state I live in now, Ohio, which does a major assessment every 6 years and a minor assessment every 3 years based on market value.
This stepped-up tax-basis, in general, thought, applies to all real estate passed on to heirs whether it is an investment or not. Granted, homeowners have the $250K/$500K tax exemption so have more freedom to decide to sell rather than hold on to something to pass on to heirs, but again that is for the average homeowner. Trump, Clinton, Obama, and many other congress critters and rich people are also homeowners and their homes are very expensive. Their gains might far exceed the measly $250/$500K tax exemptions and will also be more inclined to hold on to property to pass on to heirs.
I think this issue is more of an inheritance issue in general rather than something just landlords enjoy. The question is, when a family passes on wealth to the next, how much of that wealth accumulated do you think belongs to the government? If you wanted to argue that at least they should have to recapture depreciation I think you have a solid argument. But if you argue that stepped up tax basis should be removed for landlords, if you fairness is your issue, you need to remove it across the board.
And remember that those landlords all live somewhere, and they don't get to depreciate their primary residences as normal homeowners don't get to do and their primary residences can be passed on tax free to heirs.
Maybe if you put a capital gains exemption on landlords, just like homeowners, say of $250/$500K per sale, that might encourage more landlords to sell. If your goal is to get more homes on to the market, that might be enough to nudge some to sell now that would otherwise hold on until death.
What is your ultimate goal? If we want to make more homes available to homebuyers, we could do one or more of the following:
- Give a 7-day first look period to all homeowners nationwide on all homes on the MLS
- Give landlords a $250/$500K tax exemption on all taxes owed for each sale.
- Allow renters and homeowners to deduct normal living expenses just like a business (this would keep more renters in place and take some pressure off competition for the limited number of homes on the market) and just be fairer overall
- Raise interest rates to slow down the demand of homes
- Give tax incentives to convert vacant commercial buildings into condos
- Give incentives for elderly couples to downsize
Respectfully
Dan Tutolo