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:
- 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.
- 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.
- 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:
- 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.
- 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.
- 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!!