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Business Real Estate How Taxes Impact Property Values
| How Taxes Impact Property Values |
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| Written by Rob Viglione |
| Thursday, 18 September 2008 07:13 |
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Real estate markets are extremely sensitive to tax policy. Changes to either transfer taxes or property taxes can seriously impact valuations, so the serious investor must be familiar with at least the basics. Transfer taxes are what we pay when transactions occur, and are typically based on a percentage of the sales price. Property taxes are annually recurring charged as a percentage of assessed property value. Intuition suggests that the higher you tax something the lower its price becomes. The same is true of real estate. The National Association of Realtors (NAR) released a study in May of this year quantifying how much property values decline with discrete increases in tax rates. One example from their analysis is that for every 1% increase in the transfer tax rate there are 80,000 potential buyers driven from the market in California, alone. Property taxes are the largest recurring cost of home ownership, other than the cost of acquisition. These taxes are recurring and changes in rates can effectively render homeownership impossible for large parts of the population. As an example, consider that in LA County tax rates are 1.25% of property value. With median home prices of $435K and median incomes of $43K, this seemingly small 1.25% translates into roughly 18% of after-tax income! A small change in this rate can be devastating to a family living on the margin. Financiers undrestand that as you increase the cost of ownership you decrease value. Using discounted cash flow methodologies NAR was able to estimate that for every $1,000 increase in taxes there is a $13K decrease in home values. For properties valued at the median, this means a 3% drop in value for every 0.23% increase in the property tax rate. Understanding the basics of how tax policy impacts real estate valuations can give serious long-term competitive advantage to an investor. Keep a watchful eye on policy proposals and be ready to act before the broader market picks up on the significance of changes to tax rates, depreciation scales, and income-tax excemptions (such as exist for mortgage interest). The basic rule is that as taxes go up values go down. About the Author: Robert Viglione is a writer, hedge fund manager, real estate broker, and humanitarian. He has founded Viglione & Partners Assurance Group, L.P., SoCal Real Estate Advisors, Inc., and founded The Freedom Factory. Kindly provided by MoneyHunter.org You are welcome to use this article on your own website, if you include the link just before this text. |
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