patrick.net

Randy,

I thought one could get more tax deductions on a rental? Are you suggesting that these landlords are NOT reporting their rental income?

That's something. How do these landlords receive payments? Enforce contracts?

I think practically every owner of the 50% McMansions rented out on my block are claiming them as primary residences.
I guess I've never quite understood what's going on... but undeclared rental income would be quite a trick. I always thought it had to do with either loan terms (requiring it to be a primary residence) or building up a paper trail to claim it as a "primary residence" when sold. And 5% or 10% of $500k would be a nice chunk of change....

Best global warming website I have seen:

http://www.globalwarminghoax.com/

Sorry... OT.

astrid isn't around anymore, but has anyone else observed an increase in seed prices? In the last few days I've read five different articles on people planting huge gardens (or "microfarms") and selling produce at the local markets. Some people even claim to be making money at it.

Perhaps my dream of a gardener society is gathering steam? :o

OO, You asked about rental accounting. I am a landlord. There are tax deductions for rentals which are not available as a homeowner. A rental property is a business. Basically all of the costs of owning the property are the cost of doing business. All of the rent is revenue. Like any business I pay income tax on the profit (excess of revenue over costs). But I do get to deduct an allowance for depreciaition of the structure. So my costs include a notional amount for diminishing life of the structure (but not the land). Upon sale of the property, that depreciated balance becomes taxable income (recaptured).

If a landlord cheats on his taxes by not declaring the income, he must also forego all of the deductions except interest and property tax. This would be advantageous since rent should exceed the other expenses. If the landlord has no other property, and is renting his principal residence, then the IRS would not be likely to see any clues to this sham. His tax return would appear as though he lived in a house with a mortgage.

None of this would reduce the landlord's contractual right to collect the rent, or otherwise enforce the rental contract.

HARM, Failing to collect 1040 info might be imprudent, but it is not required. The mortgage brokers are only required to collect the tax info if the lender requires it. So if the lender is happy to skip that step (or allow the broker to skip that step) then no crime or violation has occurred.

It is a federal crime to commit fraud in applying for a home loan. So if the lender requires the info and the broker (or borrower) fakes it or provides materially false information, then a crime has occurred.

It is not a crime to conduct business in a manner that others may consider imprudent. The criminal justice system generally has no jurisdiction over foolish business decisions.

http://angryrenter.com/

All we hear these days is whining from reckless home borrowers and their banks.

But did you know that renters are 32 percent of American households? And that homes in foreclosure are less than 2 percent?

So why is Congress rushing to bailout high-flying borrowers and their lenders with our tax dollars?

Unfortunately, renters aren't as good at politics as the small minority of homeowners (and their bankers) who are in trouble. We don't have lobbyists in Washington, DC. We don't get a tax deduction for our rent and we don't get sweetheart government loans.

Quite simply, we are just Angry Renters. And now it is our time to be heard: no government bailouts!

Sign the Petition to Congress
WHEREAS: Most Americans rent or own their home outright, and the vast majority of homes (98%) are not in foreclosure.

WHEREAS: Both banks and borrowers should be reponsible for their actions, and the government should not reward reckless behavior.

WHEREAS: It is wrong to force all taxpayers-- including renters who are already subsidizing home owners through the tax code-- to pay for additional bailouts for big banks and home flippers.

BE IT RESOLVED: That Congress should not pass any bailout programs that reward risky borrowing and lending. Let the free market sort it out!

===
Sign the Petition : We Will Deliver the Next Batch to Congress on May 1st
14,917 People Have Signed So Far

http://angryrenter.com/open_letter.php

CCWD ponders foreclosure aid for customers
Published: April 24, 2008
By HOYT ELKINS

Calaveras County Water District directors Wednesday tried to decide if it is in the best interest of the district and its ratepayers to offer fee waivers or other forms of relief to customers facing foreclosure on their homes.

Weighing in on the issue were the district's finance director, its customer service supervisor and its general counsel, all of whom agreed a carefully worded resolution would be needed to enact relief, and a carefully crafted form would be required to apply for it.

At issue is whether current district policy makes homeowners in the foreclosure process eligible for suspension or abatement of water service, or if the district could provide assistance in the form of waiver of fees or penalties.

Customer Service Supervisor Douglas Wilson told the board that 159 homes served by the district have gone to foreclosure between January 2007 and the middle of this month. He identified three types of foreclosure customers: those trying to save their homes; those who live in their homes, don't pay the mortgage and eventually abandon their homes, and, finally, those who have left their homes and are not paying the mortgage.

Among the first two types, Wilson said, a high percentage continue to pay for water service even though they are not paying the mortgage. For those not paying their water and wastewater bills, fees and penalties continue to accrue until they eventually go to collection. Wilson said only about half of the money owed is recovered by the district, and also noted that liens against the property can take years to collect.

Joe should be offered the H house to rent until the bank can sell it or Joe can do a lease option. If Joe is a satisfactory tenant and pays his rent on time, Joe can buy the H house after he has paid the equivalent in rent to the loss the bank took on his original house.

"WHEREAS: It is wrong to force all taxpayers– including renters who are already subsidizing home owners through the tax code– to pay for additional bailouts for big banks and home flippers."

We do not subsidize homeowners - we subsidize borrowers.

And who pays? Mostly the debt-free homeowners.

Eliminate the mortgage deduction and there would be no material subsidy.

My goodness, I am away for a day and find my idea has morphed into its own thread.

While only a partial solution, I was striving to avoid taxpayer's dollars being used to keep the failing homedebtor in the exact same house that caused the problem in the first place. The plan would permit a large portion of note holders to receive full-payment on assumed mortgages by people who would have to prove they could actually afford to make the payments on the lower-tranch house. By making the homedebtor stand the normal "show us the 1040s" scrutiny, the note holders would have more faith in the notes being paid than by the original "liar loan" debtors. And the pushed-down people would at least become homeowners of a more modest but still real house.

What's odd is that it is not laughable to argue my scheme makes more sense than those proposed by various members of Congress and other government agencies. Who hired these guys?

I don't think there is any real solution at present, but it would be possible to at least try to come up with some form of reasonable mitigation scheme, even if it only applied to a percentage of failing homedebtors.

I think Randy and I need to debate Con Law some more.

Ever since Wickard v. Filburn held the commerce clause is pretty damn broad, the Congress has gotten away with an awful lot. Heck due to the time-lag of the Supreme Court holding any given law unconstitutional, you can get any emergency legislation up and working for several years (until the crisis passes) before it's struck down. See for example FDR's "National Recovery Act" which I'm sure he knew was unconstitutional but which was in force for a couple of years before being stuck down.

OT aside...

During celebrations of the U.S. Bicentennial on July 11 [1976], the Constitution exchanges salutes with the Royal Yacht Britannia in Boston Harbor.....Queen Elizabeth II and Prince Philip are conducted on a tour of the frigate by Captain Tyrone G. Martin and Navy Secretary William Middendorf. When the queen is shown one of the Constitution's 24-pounders, which bears a monogram of George III, she turns to Prince Philip and says, "We really must talk to the Secretary about these foreign arms sales when we get home."

The mortgage deduction is a counterproductive policy. It is intended to encourage homeownership, but ironically increases the total true cost for lower income and most first-time buyers.

The tax deduction is of very little value to someone in a low tax bracket. Most first-time buyers are in a very low tax bracket, so their benefit is small. But the high income buyers are in a high tax bracket and benefit greatly from the tax shelter. This lowers their effective cost of buying and enables them to pay more, bidding up the prices. This gives higher income buyers a real cost advantage over lower income buyers. The same house payment will actually cost a low income person more than it would cost a high income person - on the same house!

It is understandable that a person with more money can afford to pay more. But our tax policy enables the higher income buyer to actually pay less after tax for the same house!

Dennis

I agree on your point re: common law and the delay for federal statues being struck down. I'm not so sure about how long such might take given the current Supremes. It really depends upon how motivated the opposition is, and how well funded & connected they are. It's possible they could get the thing reversed in less than 2 years in the current environment, or so I read it. I'm no lawyer, just a neophyte with too much experience being dragged into court.

I agree with Zephyr that the qualified mortgage interest deduction is the largest counterproductive policy in this whole mess. Although the cap gains exemption is much more significant, most people don't make day-to-day purchase decisions based on that perk. Most people are "how much a month" buyers. So they are very susceptible to the deduction because it makes their monthly costs lower, at the cost of other taxpayers.

Then again, I think all income taxes (business and personal) should be eliminated. I believe a national use tax would be sufficient for governmental budgetary concerns. I can dream.

It's been a year or two since we dragged the MID out from underneath its rock and gave it a sound thrashing. The MID is really just a gift from the government to the banks. Joe Howmuchamonth can now afford ~10-15% more house (per month), and so house prices and interest rates immediately shifted accordingly. It's breakeven for borrowers, less for tax coffers and more for banks and homebuilders.

The MID is probably irreversible. Taxpayers like it when their house prices rise, and complain bitterly when they fall. If we really want to stimulate the economy, assist bank recovery and get homebuilders roaring back to life, all we need to do is make mortgage interest a tax credit instead of a tax deduction.

One time I told my co-worker that there is no MID in Canada, she looked at me in disbelief and said "That is so un-American".

btw, as I promised, I raided TJ today and walked away with 20 packs of multigrain pasta, hardly making a dent at the inventory on shelf.

However, the rice section right next to the different assortments of pasta which was fully stocked, was almost empty. There were probably 5 or 6 bags of brown rice scattering around three shelf compartments which were reserved for rice.

Is it really possible to collect a reward for turning in a tax cheat?

I'm not sure about that one. Even better than a "bounty" system is a "private attorney general" system. These are statutes that give private individuals who uncover malfeasance to privately sue the perp and split the fines with the government. :)

An example I'm familiar with is in patent law for the offense of "false marking" - basically fraudulently claiming an item is patented when in fact it isn't. See 35 US Code sec. 292, which offers a fine of not more than $500 "for every such offense". Part (b) states "Any person may sue for the penalty, in which event one-half shall to the the person suing and the other to the use of the United States." :) :)

The reason it has been a long time since we revisited the HMID is because when we do I end the argument with the same logic. I repeat it here because it also touches on the idea of rightsizing housing choice.

The Home Mortgage Deduction is -not- a subsidy. The HMID serves to remove the difference between business and private property treatment. Were the HMID to be reduced for typical families it would only serve to push the rich into complex tax avoidance schemes involving shell businesses holding title and the rich merely occupying the residence.

As long as the home mortgage interest deduction is viewed as a subsidy and not as the extra tax anti-investment burden it truly is there can be no rational housing policy debate.

The implication behind all this is that there exists outside of stated and revealed preference data a "correct size" for a residence. I'm as unwilling to presume such an arbitrary number as I am to presume the correct number of children. Face it, the two differ only in degree not kind. This is the steep part of the slippery slope that started with CAFE standards and gas guzzler vehicle taxes. People don't even blink at those anymore to the point that no doubt some will respond with anger.

McMansions are indeed a burden on previously constructed neighborhoods and oftentimes municipalities but they are burdens directly attributable to several new urbanist preferred outcome distortions and not some emotional gut response to any perceived excess. Tax policy isn't the problem or solution. West Germany used to tax propety based on the number of rooms, this led to homes with no closets which were classified rooms. The same avoidance schemes are the only predictable outcome of trying to control housing form.

Housing is a hybrid of both a consumable product and an investment vehicle and thus defies absolutist claims of either characteristic. Any further attempt to seperate the two will also devolve into a game of tax avoidance. As much as the current no limits deduction is unfair it is also less unfair than any other possible alternative.

Oh, and happy 600th post!

I don't know who said a tax deduction should phase out with the size of the house. I believe the argument made is whether or not it should exist. Many here say it should die an ugly death, but aren't holding their breath.

I don't see how the treatment the tax code affords business owned property is relevant in determining whether or not HMID is a good thing, unless you want to argue that it (or its equivalents) should be eliminated for both. There are many tax issues a business gets to deal with in a different way than I do. Maybe we should decide that everybody is a business. I get to depreciate my body as it ages. Until that happens, such comparisons don't help. I see the question as a "simple" one: is the deduction somehow a public good or not?

Were the HMID to be reduced for typical families it would only serve to push the rich into complex tax avoidance schemes involving shell businesses holding title and the rich merely occupying the residence.

ALL tax avoidance schemes are very easily rendered obsolete with a flat land-value tax in place of all other taxes. No income tax, no sales tax, just a tax on land that neatly corresponds with geographic jurisdiction and is completely public information.

I do harp Henry George's ideas, but they have a really compelling logic to them.

Patrick, the flat land-value tax seems appealing for its simplicity, but it is also somewhat obselete. It's best applied to farms and manufacturing. Suppose I started a fabless semiconductor company with overseas manufacturing? I could be generating several million dollars of profit every year, but my geographic footprint here would be tiny. Are you going to tax me at $1000/year because I have a 1500 sq.ft. office?

I think practically every owner of the 50% McMansions rented out on my block are claiming them as primary residences. (Us bitter renters know because they ask us to do silly things like “please just keep the water bill in my name and pay it on my behalf”).

That may not be motivated by tax cheating. The issue may be that the financing on those homes strickly stated "owner occupancy." The McMansion debtors may just trying to avoid the banks finding out about the renter and thus triggering a loan due clause.

Are you going to tax me at $1000/year because I have a 1500 sq.ft. office?

Why pay so much? Since the tax is only on unimproved land value, just buy a 1500 sq ft "condo office" in a multi-story building where that $1,000 tax is split among a multitude of condo owners.

HeadSet: My point is that getting taxed only on the land value is absurd in many situations. Several classes of business can produce considerable returns without large-scale consumption of raw land or natural resources. By virtue of geographic size alone, a cornfield in Iowa would be taxed more than most mid-sized Silicon Valley companies.

To which I might add, in our present technological era, George's theory would simply create a different type of freehold elite. Some corporations which occupy little geographic space would immediately become immensely profitable, at the expense of other businesses like farms, manufacturing and natural resource extraction.

No doubt many on this forum will applaud such a measure, but I see no value to society from elevating the technologists at the expense of those with more tangible holdings. Companies should be taxed on delivered value, and the best measure of delivered value is profit.

BAI,

>Maybe we should decide that everybody is a business.

Every few years I have been thinking the same thing. Or rather, I have been thinking the opposite: Why to businesses get so many tax advantages that indivuduals cannot enjoy? I think the simple answer is political influence, and not so much the usual claptrap about how they add value to society ("provide jobs", "create investment", etc). I won't say that it is all wrong, but quite a bit of the rationale is really just self-serving mumbo-jumbo by the business-owning class of the population.

Business taxation as currently implemented leads to all kinds of wasteful spending on everything from paper clips to airplane tickets to corporate jets and golf junkets to the Bahamas.

So, yeah, it might be a good idea to tax individuals in a way more similar to business taxation, although I can already see a few areas where that method also would create some bad unintended consequences. For starters, how would we get even close to balancing the federal and state budgets, given the very predictable drop in tax revenues.

Consider also that the typical model of business taxation penalizes savings and encourages debts, which is counter to what many people on this blog believe in.

Why? Because a business gets taxed on whatever profit is left after "expenses" and "capital investments" (modulo depreciation). If the business wants to save up tp buy a house, it has to pay tax on profits and then bank said profits as savings or non-capital investments.

Randy, I posted this a while back but noticed you were asking about this for landlords evading taxes. The simple answer is yes, reporting tax evaders gets you a reward of 15-30% of the collected evaded taxes.

http://www.irs.gov/newsroom/article/0,,id=176632,00.html

How come no one here is complaining about the renter's tax credit? Basically that is a bribe to list persons receiving rental income, but isn't that a subsidy as well?

So much for "primary residence" cheats... :-(
To be eligible for an award under the new procedures, the tax, penalties, interest, additions to tax, and additional amounts in dispute must exceed $2 million for any taxable year and, if the taxpayer is an individual, the individual’s gross income must exceed $200,000 for any taxable year in question.

justme: This is a poor time to raise corporate taxes. Other countries are offering tax shelter status with very low requirements. Two years ago my company relocated its corporate HQ to Singapore from the Bay Area. We maintain a token presence in Singapore, and in return we pay 10-15% taxes. If you raised U.S. taxes, more companies would just move their income center offshore, and we'd get less tax revenue, not more.

And when the income center moves, it cannot be too far distant when many cost center operations move to Asia as well.

RE: corporate taxes

US corporate tax rate is already way too high. But it is impossible to get a liberal to understand the importance of low tax rates. Save your breath.

Business taxation as currently implemented leads to all kinds of wasteful spending on everything from paper clips to airplane tickets to corporate jets and golf junkets to the Bahamas.

Taxation itself leads to "all kinds of wasteful spending on everything from paper clips to airplane tickets to government jets and golf junkets to the Bahamas."

There is no such thing as "wasteful spending" in private enterprises because all corporate behaviors are blessed by Free Market.

Anyone who mocks private jets is either poor or unenlightned or both.

Brand,

>justme: This is a poor time to raise corporate taxes

I did not say anything about raising corporate taxes.

Peter P,

>Anyone who mocks private jets is either poor or unenlightned or both

How about arguing the issue instead of labeling the person? I simply made some observations about the structural properties and effects of common business tax policy, e.g. that business tax structure (as currently implemented) discourages business saving. Tell me instead whether you agree or disagree with said observations.

justme
I see the points you raise. I also see that you realize we can't go in that direction:

So, yeah, it might be a good idea to tax individuals in a way more similar to business taxation, although I can already see a few areas where that method also would create some bad unintended consequences. For starters, how would we get even close to balancing the federal and state budgets, given the very predictable drop in tax revenues.

I tend to side with Brand. In today's environment, when you squeeze your most productive businesses too much, you not only have to worry about stifliing them but also about them taking flight for a tax shelter. Naturally a country like the US has quite a bit of leverage beyond tax policy but I don't see us using it.

I have no idea how to present a complete solution to revamping tha tax code. All I was saying is that the HMID is a susbidy and that I can't see the benefit from it. Tax treatment of businesses is a separate issue for me. So is tax evasion..

I tacitly already knew you couldn't get any green by reporting your tax-cheat landlord. That violates the first law of common sense: if it were true then everyone would be doing it.

There have to be some barriers, or else every single renter would fire off an email on their way out the door for the last time hoping to get a little payola. In reality no only does the infraction have to be large enough to pass muster, but you have to have some real evidence. Not just "he made me pay the water bill in his name" or "he bragged to me that he was a cheating sonofabitch", but something tangible the IRS can use to start after him with high confidence they aren't just playing bitter-renter-tool.

That violates the first law of common sense: if it were true then everyone would be doing it.

I don't know about that Randy. It is true, for example, that getting into debt over your head is a stupid idea, but nowadays "everyone" appears to be doing that.