Home Renters Should Not Pay More Taxes: A Rebuttal On Financial Samurai’s Article

This article is in reference to a very interesting article that I read last week about Financial Samurai’s Renter Should Pay More Taxes. I recommend that you read it first before you read this article. It is a very interactive discussion and everybody brought up good points.  I have been following his blog and have been a big fan of it as I think he’s got very valid points. However, I think I may have to disagree on him on this one.

Taxes Come In Various Forms

Property tax, sales tax and rental tax are taxes assessed for different reasons and because of this, all of them can be charged simultaneously by the government if the government wanted to. For example, if you buy a car you are both paying a sales tax when you purchased it and a property tax for  every year you own it. Now is it double taxation, maybe, but we’re talking about two different taxes for various purposes. And yes, every time that the car is sold, the new owner will pay sales tax on it because that’s how it works. The concept is the same for renters tax and property tax, where people can potentially  pay both a renter tax and property tax for the same property.

I think the best way to explain this home renter’s tax is the car rental tax.  On a rental car, the company who owns it pays for the property tax but the person who rents the car pays for the rental tax. The state or the county are charging car rental tax because if you are using their road, they want you to also contribute to the maintenance and improvement of it. It is pretty much targeted to the tourist to make sure that tourist who are using the local roads should also pay their fair share. I think this is where Financial Samurai really want to compare the home renters tax argument. Since renters are also using the community or schools, they should also contribute to the community in the form of a renter’s tax.

Now going back to the car rental scenario, would the company include the cost of the property tax in the cost of the car rental, ABSOLUTELY! But the cost that they charge you goes to their pocket. However, with regards to the rental tax, this does not go to the owner’s pocket but it goes to the government. Whatever the car rental company collects on rental tax, they need to turn around and file this to the government agency. Now if we use this argument on the house rental, it works the same way. However, renters may look at it as an unfair deal since they are pretty much subsidizing the property taxes that the homeowners are supposed to pay as well. Is it double taxation on the renter’s side? Maybe, but we can make the same argument with the car rental tax!!  So renters cannot win this argument but instead they can make a case on the tax benefit  for the homeowners!!! 

Homeowners Whining About Equality

On last weeks post, I talked more about the various financial benefits of owning a house and one of them is the tax benefits such as:

  1. Additional Itemized Tax Deductions - homeowners can deduct the mortgage interest and property taxes on their tax return. Since mortgage interest alone is more than the standard deduction in most cases, the homeowners are able to deduct additional expenses such as charitable contribution, unreimbursed employee expenses, state income taxes, gambling losses, casualty losses, investment expenses, health expenses, etc. Renters are not able to do that and majority are pretty much stuck on the standard deduction. Heck, renters can’t even deduct the rent expense the way businesses deduct office rent and home owners deduct mortgage interest.
  2. Using Equity to Consolidate Loans – When the home builds equity, home owners can pull out a home equity loan and pay off higher interest such as car loans, credit cards and other personal loans. The interest paid on these home equity loans are tax deductible as well. For renters, no asset means no equity, thus, renters are stuck on paying high interest car loans and credit cards and are not allowed to deduct the interest on their tax returns.
  3. Capital Gains are not taxed. When homeowners sell their house and assuming that they live there for 2 out of the last 5 years, the capital gains of up to $500,000 for married ($250,000 for single) are not taxed. What if the renter chose to rent instead of buying and invest the difference ( between the cost of house and rent assuming that the person really can afford) in stocks? Assuming that both parties have capital gains of $100,000, when they sell their assets (the house for the homeowner and the stocks for the renter) after 5 years, the renter will get taxed on the $100,000 gain while the homeowner is not. On the $100,000 capital gain, the homeowner will keep the whole thing while the renter has to pay 20% tax, which reduces his/her net gain to just $80,000.

The renter can make this argument, renters will only pay home rental tax under the following conditions:

  1. Renters can deduct the rent expense and the rental tax on their tax return the way the homeowners benefited from mortgage interest and property tax. If the government does not allow it, please take those tax relief from the homeowners to make it FAIR. Then we can talk about EQUALITY.
  2. Homeowners cannot deduct the interest on the home equity loans that are used to pay-off high interest loans such as car loans, credit cards and personal loans. It is just NOT FAIR that the renters, who does not have this option, are unable to deduct these high interest loans while homeowners are getting away with it.
  3. The home owner’s capital gain exclusion of $500,000 (for married or $250,000 for single), which can save the homeowners up to $100,000 in taxes, should be discontinued. It’s just NOT FAIR that if renters invest their money in stocks instead of a residence, they have to pay capital gain taxes on that while homeowners are getting a freebie.

If these conditions are not met, then renters should not pay rental taxes!!!

The tax laws are very complicated as it favors some but not everybody and this will not change. However, if homeowners argument is about EQUALITY on the tax law where they don’t benefit, then they need to agree to give up the other tax relief that benefits them as well. This way there is TRUE EQUALITY between renters and homeowners. Don’t ask for equality on one end and totally ignore the tax relief where you fully benefit! And if homeowners don’t like their current tax situation, then jump on the other side. Homeowners in general ALWAYS have a choice to sell the house and become renters. On the other hand, NOT ALL RENTERS  have a choice of becoming homeowners because majority just CAN’T AFFORD to buy a house.

My point is, homeowners should not envy the renters if renters don’t pay rental taxes.  This is the only thing good going for the renters while homeowners get to have more tax benefits. We’re talking about 3 great tax breaks for the homeowners versus one tax relief (no rental tax) for the renters and the homeowners want to take away that single tax relief for the renter? I just don’t get it! Homeowners should be thankful and be fortunate that they can afford their home and own it free and clear after 30 years of making payments while renters, who cannot afford a house, will have SQUAT after 30 years of renting!!

What do you guys think??

Photo Credit: Sean Dreilinger

Comments

  1. Hope you get discussion, but I donno.

    What makes you think that most renters can’t buy? That is one of my main points. Renters aren’t the peasant poor of the past anymore.

    I believe there are renters out there who truly believe writing a check annual to the gov’t to help support their environment exist!

    Renters know in their hearts they are not directly supporting the gov’t by paying rent.

    • Ken says:

      I don’t think I’m going to get that much discussion here as you do on yours. I think people will respond more on your blog than my blog. Discussion started on your blog and I’m pretty sure that it will continue there.

      However, one of your main points, too, is about equality and like you said “YOU ARE A BIG BELIEVER OF EQUALITY AND THERE SHOULD BE EQUALITY FOR ALL.” Do you think there is equality when homeowners get more tax breaks than renters? That’s why the proposal is “Renters” will pay taxes as long as there are equal grounds with the tax breaks as the homeowners.

      Yes, not all renters cannot afford to buy a house but what about those who truly cannot afford to buy a house, are you going to ignore them? If you believe that there are renters out there who truly believe that they can write a check to the government, they can still write a check in the form of a donation. But you cannot force the one’s who cannot write a check, especially those who are the truly peasants which you seem to ignore a lot, unless you are also willing to give up tax breaks for homeowners so everybody is on equal ground. Just because you probably live in a place where you see a lot of renters who are able to afford to buy a house does not mean that this is always the case throughout the nation. I think you need to open your eyes a little bit more or travel outside of San Francisco so you can truly see the renters who cannot afford to buy houses.

      There are tax loopholes in America and a few people are getting away with taxes because they know those loopholes. Is there anything we can do about it? No, but they are getting away with it anyways even if they can afford to pay taxes. It works the same way with the rental tax. It is what it is so even if people can write that check, it does not say that they have to pay taxes so they won’t pay the taxes.

      Again, if they are willing to write a check, they can do it in the form of the donation.

      • You and I know that left to people’s own devices, people won’t contribute as much as if there was a law.

        The people of America voted for big government and more taxes, so I am just playing a long and supporting the initiative.

        Everybody needs to pay their fair share of taxes, not only the 53% of Americans who do. This is a great way to capture more revenue.

        I’ve been all over the country, and I believe Renters are doing fine and you and others can’t just brush off the fact that b/c they are renters, they are poor.

        • Jose says:

          Financial Samurai must be a rich guy and he must just be traveling where rich people go. Next time you travel, try to visit my community and see for yourself if the some of the renters are doing just fine before you make that generalization that “Renters are doing fine”. It’s baseless. As great as America is, there are still homeless guys, people living paycheck to paycheck, and there are still renters that are poor!

  2. Little House says:

    As a renter, I of course don’t want to pay property tax on a property I don’t own. For one, my landlord is already factoring in some of his tax into my monthly payment. For instance, I pay $1,800 a month in rent and he pays that same amount annually in property tax. I don’t have the benefit of writing off any portion of my rent towards taxes, like my landlord does and as your point is stressing.

    Another sticky point where charging rental tax would be problematic would be for renters who move around often. What if a renter only lives in a property for 10 months? Should that person have to pay property tax for the whole year? I liked your analogy with rental car tax to rental property tax, but I can some gray areas with charging renters tax, even if they were able to benefit from write offs as homeowners already do. I’m not a big proponent of raising taxes, so even if I were a homeowner I wouldn’t be for charging renters tax on properties where homeowners are already paying it!

    • Ken G says:

      I’m not a big proponent of taxes either and I don’t want to see that renter’s tax. It is unfair no matter where you look at it: as a double taxation and the fact that homeowners are getting the all tax break.s while renters are not.

      I just hate homeowners who complain and use EQUALITY as their argument to make the case about increasing taxes for the renters.

    • I hope you are against the government raising taxes on the “wealthy” next year either.

  3. I am a renter who cannot afford a house at the moment. And I say we are already paying tax in form of the rent. Last year when we were living in a house (I mean not in an apartment, an individual house), the landlord increased the rent because his property taxes went up. So to me it does look like the “renters” are paying the taxes and not the home owners :)

  4. Ken G says:

    Thanks Suba for your input and I agree that the property taxes are already incorporated in the price of the rent.

    ,

    • Are you for or against Obama and the Democrats desire to raise taxes on those individuals making over $200,000 a year?

      • Ken G says:

        Just an FYI, I am against it! The government needs to cut back on wasteful spending and stop raising more taxes.

    • So long as one is AGAINST raising taxes on a certain group of people next year, I’m OK with those opposed to the Renter Tax. If one is FOR raising income taxes on those making over $200,000 and AGAINST a Renter Tax, then that’s just messed up and a double standard.

      Can we agree on this?

      • Ken G says:

        Totally. We can agree to that. Of course on top of: We can agree to disagree!… And you’re right, we don’t have to agree on a lot of arguments as we are all entitled to our own opinion.

        It’s been a nice discussion Sam and thank you for all your comments!!

  5. Squirrelers says:

    Property owners are already paying real estate taxes. Those taxes are passed along to renters as a part of the rent they pay. Really, in my view, that’s where it starts and stops.

    • This is exactly what I was going to say and you beat me to it.

      Having a renter pay a separate renter’s tax would be double-taxation.

  6. I too follow the good Samurai’s blog and he always creates lively discussion on his posts.

    I say the concept here is simple. There is one single property tax. If you create a renter’s tax, then one individual property is taxed twice. I don’t like the idea of double taxation, so I’m opposed to the renters tax. If the owner wants to pass the tax along to the renter, that’s fine. If not, that’s fine too. Just don’t tax the same living space twice for Pete’s sake!

  7. The property is the thing that is taxed. If you add a renters tax, then the individual property is being taxed twice. The owner of the property may choose to pass that financial burden onto the renter, but don’t tax it twice for Pete’s sake!

  8. Pianist says:

    The original poster (Ken) is entirely correct here, and I don’t understand why this is even an issue. Renters pay property tax as part of their rent. Period. All you need to prove this is to examine the laws of virtually any state. Since many states allow renters under some conditions to take deductions or credits for property tax, obviously as far as the states are concerned, these taxes have been paid by the renters. For example:

    NJ: “Homeowners and tenants who pay property taxes, either directly or through rent, on their principal residence in New Jersey may qualify for either a deduction or a refundable credit on their New Jersey resident income tax return.”
    http://www.state.nj.us/treasury/taxation/njit35.shtml

    NV: “This statewide program refunds a portion of the property tax paid by eligible senior citizens on their residence or by property taxes paid by renters through their rent.” http://www.nvaging.net/tax_rent_assistance.htm

    MN: “You may be eligible for a property tax refund based on your household income and on the property taxes paid on your principal place of residence, even if you rent.”
    http://taxes.state.mn.us/prop_refund/pages/refund_information_content_renters_refund.aspx

    AZ Form 201 is entitled “Renter’s Certificate of Property Taxes Paid.”
    http://www.azdor.gov/LinkClick.aspx?fileticket=KwSFov5UgpA%3D&tabid=257&mid=878

    WI: The worksheet Calculation of Wisconsin School Property Tax Credit Tables For Tax Year 2010 includes a Renter’s School Property Tax Credit Table.
    http://www.revenue.wi.gov/taxpro/calctbls.html

    MT: “The Treasure State has a nice prize for its elderly residents. They might be able to claim Montana’s Elderly Homeowner/Renter Tax Credit. As the name indicates, this tax break is available to renters as well as homeowners as long as they were 62 or older by Dec. 31.“
    http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2010/03/montana-tax-tidbit-elderly-homeowner-or-renter-credit.html

    In New York City in fact, “the burden on renters is disproportionately high compared to what is paid by owners of condos, co-ops and especially houses.”
    http://www.henrygeorgeschool.org/renterspay.htm

    The fact that renters do not pay these taxes directly to the taxing agencies is irrelevant. I myself live in a mixed co-op/rental development in New York. I do not pay property taxes directly to my local taxing agency; instead, they are paid via the maintenance fee I pay the co-op. But because shareholders in a co-op are treated identically to homeowners for tax purposes, I get an annual statement of my real estate taxes paid on a Form 1098, and I can deduct them on Schedule A as if I owned a house.

  9. If the renter isn’t paying the property taxes, then where is the money coming from? If a property owner rents out the property, the property tax is an expense, and his revenue from the renter pays 100% of that expense. Therefore, it’s the renter that’s paying it!

    You can argue about where the equilibrium of rents would be were it not for property taxes, but clearly the money is coming from the renter in some way or another.

  10. 101 Centavos says:

    Any type of property tax, whether real estate or personal property, is unjust and should be repealed.

    • Ken says:

      Some states like Texas and Nevada advertise that they do not have any state income tax to entice people to move to the state. However, they charge a higher property tax to make up for it. Somehow, individuals just don’t have a way out when it comes to paying taxes.