patrick.net

Simply No. I think the class of owners in this category are probably so few that it wont register any meaningful signal.
Any sophisticated home owner concerned about any future Capital gains taxes would probably have long been out of the current market. The risk of House price depreciation has got to be more urgent than any future Capital gains taxes .

I think this is an interesting point, The last time they raised taxes they made it retro-active to the beginning of the year, and people will remember. So if we see any effect in housing from a potential raise in capital gains tax, we will see it as soon as the MSM starts seriously reporting this is what the majority in congress intend to do. It also wouldn't surprise me to see congress do away with the 500K exemption for married couples on their home sales. If some genius in the MSM figures out the lost "revenue" from this exemption over the last 5 years, I bet it would more than make up the lost "revenue" from removing the AMT. But that was the last 5 years. I bet the next 5 years will be different. Either way, I think the retiring boomers are going to have a huge effect on housing as well as the stock market. They are still buying into the market, but when they retire they will be selling their stocks to live on the income. They will also be moving to lower cost of living states and into smaller, cheaper houses, regardless of the tax consequences.

Rising capital gains rates are probably a small factor even with liquid assets like stocks. I doubt the average person really thinks about it, and that goes double for houses. People just aren't that sophisticated...

KT, they actually are making the tax changed retroactive to the date you BOUGHT your house. When I bought my Cambrian Park house in 1981, the tax law at the time granted people 55 and older a "once in a lifetime" capital gains exclusion of the ENTIRE AMOUNT of the sale of one's home. The alternative was that ALL sales were treated as currently under a 1031 exchange. The "once in a lifetime" exclusion was done away around 1986 IIRC and the rolling-forward exclusion was done away around 1995. At this time the current exclusions for one's residence were enacted.

I would argue that the tax law in force at the time of purchase should be followed......

As an example, my parents bought a condo in Los Gatos in 1974 for $55K and sold it only 5 years later in 1979 for $185K. They paid NO capital gains tax. While a profit of $135K doesn't sound like much these days at the time it was a great deal. And the exclusion didn't care if the owner was married or single.

Making retroactive changes like this would simply be illegal among private parties in contract law. The constitution also makes it illegal for the government to retroactively make actions criminally illegal. Too bad it dosn't prevent the government from making tax changes retroactive.

Patrick,

I made it in, finally. Thank you. It is unfortunate that registration is needed. I wonder if there are any other methods that may work. In some sense, in the original system, the combination of your username and your email address was your authentication, because nobody else would know the email address associated with the user name.

Perhaps one way of avoiding spammers is to require that any new user/email combo used to make a post goes either into moderation, or requires a loop through an email exchange, which ever comes first. Presumably that would be enough to stop spam.

I freely admit I know nothing about how Wordpress works, so my suggestions may not work or apply . I just got a bit frustrated with the email problems of the registration process, although likely none of Wordpress's fault.

Cash is king?

I'd like to pose to the financial types on the blog a question about cash management. Since we are all more or less sitting out the bubble, we need a place to park (some of) the downpayment while we wait.

Now, various internet banks and such will give you about 5% APY, which is decent but not stellar. Recently, a largsih broker that I use recommended a place called "thereserve", which links up to my account and pays something like 5.5%.

My question: What do the financial types here think about this outfit? Is it likely that they are loaded to the gills with MBS, CDS and other toxic waste?
I'm asking from the perspective of conserving the principal, here.

The answer to the question overall is "no". Cap gains taxes will not have much affect on prices or supply, virtually none over the short term (2-3 years), and still barely significant over the long run (15+ years).

People mentally account for taxes very differently than other rate-fees. Taxes are viewed as ubiquitous and unavoidable beyond certain levels. In other words, everyone has to pay them so the playing field is even. There is some rationality to that, in fact. But certainly, most people are fatalistic about taxes; very few people make forward looking decisions based upon the fear of being taxed in the future. After all, you aren't taxed (in general) unless you have something to be taxable.

Rather, the *real* tax factor in real-estate pricing is the qualified mortgage interest deduction. The fact I can deduct the interest on up to $1.1mm of loans ($1mm + $100K hel) makes a very big difference on how much price I am willing to pay. It is this deduction that boils down to the government subsidizing my use of leverage at the cost of people paying cash to rent.*

*And note, I am presently one of those people paying cash to rent. I'm just personalizing my comments, and pointing out that when I do buy again I will be doing so fully aware of the amount of $ I gain through tax shelter. Zero of this calculation has to do with future cap gains. If I "accidentally" get lucky and have more than the exemption worth of gains when I sell, then so be it. I'll pay the taxes while laughing to the bank (and bitching that I pay too many taxes).

If you want a tax that might hurt upper-end housing prices, focus on the proposed taxation of carried-interest. If they tax that at income instead of gains then a lot of IBs, PEs, and VCs won't have nearly as much fat green to plunk down on their $4mm pads.

I agree that tax law does have an impact on housing, but I imagine most people aren't thinking about capital gains tax %ages per se. Most people who talk about housing as an investment mention the mortgage interest deduction and the $500K exclusion from capital gains tax for couples. They would be really angry if these factors changed. And these particular tax laws do in fact make housing look like a crazy good deal--where else can you borrow money for an investment, avoid paying taxes on any money that you make which is used to pay the loan, and then make more tax-free $ when you get around to selling the property you may never have actually owned?

Not that this sort of situation is likely to create a problem....

Because of Realpolitik, the tax situation surrounding housing is extremely unlikely to change anytime soon or without some massive crisis. I include qualified mortgage interest deduction, capital gains, and property taxes (prop 13 in CA). No politician in his or her right mind would risk touching those rails unless their constituents are mostly college town or inner city renters.

Abolish the income tax like Ron Paul proposes and this will not be an issue.

Even today, individual income taxes account for only approximately one-third of federal revenue. Eliminating one-third of the proposed 2007 budget would still leave federal spending at roughly $1.8 trillion – a sum greater than the budget just 6 years ago in 2000! Does anyone seriously believe we could not find ways to cut spending back to 2000 levels?
- Congressman Ron Paul

Ron Paul 2008
http://tinyurl.com/2cja7x (awsome youtube vid explaining his views)

Removing the preferential tax treatment will certainly remove much of the RE investment mystique. Generally, my retirement savings are going into Roth 401K. I figure there's almost no future tax hike danger there, since I already paid my taxes going in.

DinOR,

Eliza,

I think you've nailed it. When it comes to housing (and they way they're financed) it IS a "crazy good deal"! Randy H is right, most folks really don't put much effort into crafting their tax position going forward. They don't have to!

If taxation is such a non-issue why have there been article after article regarding the ever optimistic American's over reliance on their home equity as a cornerstone of their retirement? In fact, in a lot of cases it their only "stone"!

Look, in ways this thing has become so lop-sided that the homes themselves became of little consequence! People were buying condos sight unseen w/ nothing down! Why!? Well b/c it would be a lay-up to show it as a "primary residence"! True... many were sold several times before they found an actual "end user" but what was it that lead to that mentality?

I suspect what many downsizing boomers will do is cash-out (by basically repurchasing their own home) prior to selling to keep under the 500K limit.

DinOR

Dinor,

In California the sale-repurchase wouldn't work because you would lose you Prop 13 basis. The sale-repurchase might work in other states with greatly appreciated real estate, though..

Dinor,

In California the sale-repurchase wouldn't work because you would lose you Prop 13 basis. The sale-repurchase might work in other states with greatly appreciated real estate, though..

Sales with no business purpose beyond tax benefits is not allowed. However, it does seem as though everybody is doing it. I predict a lot of audits and full employment for tax lawyers in the years ahead.

OT, but homebuilder confidence is now at the lowest point it's been since 1991. And we know how great 1991 was for housing!

http://money.cnn.com/2007/06/18/news/economy/home_builder.reut/index.htm?postversion=2007061813

I hate to admit it, but Randy is right --expect no changes to either Prop. 13, mortgage interest deduction, or cap gains deduction anytime soon. No politican in his/her right mind is going to want to touch those if they want to remain in their job.

About the only thing they *might* be able to get enough popular support for is to scale back cap. gains to primary residence only (no flippers) or removing Prop. 13 protection from holding companies (but not individuals). But even those modest reforms would require a tough protracted battle against powerful, politically well connected special interest groups.

I hate to admit it, but Randy is right –expect no changes to either Prop. 13, mortgage interest deduction, or cap gains deduction anytime soon. No politican in his/her right mind is going to want to touch those if they want to remain in their job.

How were they able to get rid of interest deduction for credit cards?

I'm simply shocked that they were able to do something like that.

test

How were they able to get rid of interest deduction for credit cards?

Good question. Possibly because back then (1986) not as many Americans had credit cards, or carried nearly as large a revolving balance as today? 69% of the public (which votes more frequently than renters) is pretty hard for a politician to ignore.

scale back cap. gains to primary residence only (no flippers)
So what do you really mean by this comment HARM, as this is currently how the program is structured. Personally, I will give anyone who is willing to go two years their due (flipper or not). Are you suggesting a longer holding period? Or just vigorous enforcement :-)
On a side note, SF has a supevisor who is facing felony charges as the DA contends he does not actually live in the district he represents. Interesting to see the lengths to which the investigation went to show that he does not live in his "primary" residence (which is actually owned by his father). Initial reports showed him being done in by a very small water bill. Oh, and he is also being investigated by the FBI on bribery charges. I imagine the IRS would have an easier time of it (checking address on tax return against properties sold) for capital gains evaders.

eburbed

IIRC income tax brackets were reduced at the same time CC interest deduction was scotched.

scale back cap. gains to primary residence only (no flippers)
So what do you really mean by this comment HARM, as this is currently how the program is structured. Personally, I will give anyone who is willing to go two years their due (flipper or not). Are you suggesting a longer holding period? Or just vigorous enforcement :-)
On a side note, SF has a supevisor who is facing felony charges as the DA contends he does not actually live in the district he represents. Interesting to see the lengths to which the investigation went to show that he does not live in his "primary" residence (which is actually owned by his father). Initial reports showed him being done in by a very small water bill. Oh, and he is also being investigated by the FBI on bribery charges. I imagine the IRS would have an easier time of it (checking address on tax return against properties sold) for capital gains evaders.

eburbed

IIRC income tax brackets were reduced at the same time the CC interest deduction was scotched.

sorry. it takes a looooooooooooong time (3-5 min) for comments to post.

why?

I wish the goverment would get rid of the mortgage deduction in addition to raising the cap gains tax. I would prefer a $50k one time only tax credit over the deduction for first time home buyers. I think it would do more for bringing the home prices back to acceptable levels.

I also think the CPI numbers should be calculated with honest interpertations. We would be at a 10% inflation rate now if we used the 1970s methods. The data is still honest, the government is not. Previous administrations have "readjusted" their formulas to hide the truth and get all the American sheeple in step.

Blog gurus. Please remove my post from moderation (and delete the duplicate). I guess I shouldn't have used the term l*ngths?

I wish the goverment would get rid of the mortgage deduction in addition to raising the cap gains tax...I also think the CPI numbers should be calculated with honest interpertations.

And I wish for world peace in our lifetime, Santa Claus to be real, and the Chicago Cubs to win the World Series...

How were they able to get rid of interest deduction for credit cards?

As HARM pointed out, there was a whole lot less CC debt back then, though it was still pretty high compared to say 10 years earlier than that.

I don't have time to dig up the arguments on google & wiki, but my every hazy memory recalls that the change was a failure-to-renew rather than an elimination. I think it was also tied in with other legislation that limited the upper-limit CC companies could charge and how they could calculate payments. I remember 60 Minutes showing how some CCards had effective annual rates over 74%. I think Congress put a stop to that along with the tax change.

@Skibum

My expectations/wishes are actually possible, I doubt the the Cubs will ever win the World Series.

I understand the resistance pols will have to taking away the housing tax breaks, but the pols do not always do as the people wish. Just look at how hard they are trying to push the immigration bill through, and that is only supported by about 20% of the people. I would bet raising taxes on real estate including the 500k deduction and the mortgage deduction would have more support among the people than the immigration bill.

The '86 tax reform bill cleaned up a lot of the garbage that had built up in the tax code over the preceding decades. Now we have had 20 years of additional crap larded onto the tax code. It is time for a new sweeping tax reform bill, in my opinion (reforming the code is sort of like pruning trees--the branches always grow back).

Unfortunately, tax reform doesn't seem to be high on the list of priorities for any of the presidential candidates. If a democrat wins we will likely see a host of new "targeted tax breaks" (ie: more complexity and more opportunities to game the system). If a republican wins, we will likely see more "economic incentives" (ie: industry handouts). Either way, I don't think the voters are demanding a massive tax code overhaul at this point, so it is unlikely that it will happen.

@FAB

Off topic, but I've sent another request to your email.

@all

We're preparing a healthy wave of bid offers, and I'll be blogging about how we've refined our strategy, etc. For those not familiar, we offer low-but-fair, look for weak spots where there's downward competition and over supply, and we don't use a buying agent (and we do use a real estate attorney). We might do another "reverse multiple offer", where we offer on more than one simultaneously and add a contingency that we'll select the most acceptable counter/acceptance.

If for no other reason than to see the look on some of the agents faces when they receive their first "reverse multiple offer"; especially after trying so earnestly to convince me that "multiple offers are back". Yep, they are. Just the other way around.

And btw, we're getting calls back from agents (in MV) begging us to reconsider buying homes we've viewed now that there have been "significant price reductions". Indeed, a couple of these are down more than $250K.

My guess would be we're due for a massive tax overhaul around 2015 or so. By then there will be enough real pressure on entitlement programs to force the issue. Also by then they'll be able to start chipping away at our 401k et. al. tax deferred savings.*

* I still strongly advocate fully funding one's 401k/SEP/IRA. But be aware that the current tax savings calculation is almost guaranteed to erode over time.

** I think this is the saddest statement of all, that we'd allow our retirement savings tax benefits to be culled before we'd allow our home-owners tax benefits to be culled. But that be Realpolitik.

"I think this is the saddest statement of all"

Yes sir, it is. In fact, many of us allowed ourselves to be swayed by mortgage "planners" into buying off on "buying as much house and borrowing as much money as you can get our hands on!"

"I don't know about you... but I've NEVER made ANY money in the stock market! With the $524.89 you WERE putting into your 401K I can "qualify" you for another 100K in an "investment" that IS going some where!" Yada yada.

In order to correct this we'd have to move the cap. gains exemption out to at least 5-8 years and more like 10! As things stand now, 401K/IRA dollars are "some day" dollars. REIC dollars are "right now" dollars. Why wait for 59 1/2 for "tax deferred dollars" when you can have "tax FREE dollars" TODAY! :)

Randy,

Well, it might come to that, esp. if there's massive stagflation or depression. I think future tax rates, esp. capital gain, will almost certainly be higher. That's why I want to lock in the current low tax rate under Roth. Deferring tax to the future is almost certainly going to be a mistake even for people at their peak earning capacity.

DinOR

@astrid,

Oh you're right, and... (without getting political) with the tab we're running up it's all but guaranteed! In FP circles the debate has moved to, how much and when?

Just another example of how distorted the REIC lobby has "sculpted" our tax code, country and their rightful place at the head of the line.

Oh and sorry about the confusion on the screen name. Obviously I botched that when the reg. was implemented. I'll get a hold of Patrick to straighten that out. :(

DinOR

Good luck on the offering, Randy! Make sure to keep a notebook around to jot down entertaining things said to you by realtors as you go about your business. I'm sure you'll hear some colorful things.

Brandon

> it takes a looooooooooooong time (3-5 min) for comments to post.

I finally demanded that he.net move me to a different server, which they did. Unfortunately, the did not move the patrick.net DNS domain name at the same time. You may have noticed that the site was unavailable as a result from about 7pm last night to 6am this morning.

Oy. I would dump he.net, but it might cause yet more problems, and so far this new server seems OK.

Patrick

I think future tax rates, esp. capital gain, will almost certainly be higher. That’s why I want to lock in the current low tax rate under Roth. Deferring tax to the future is almost certainly going to be a mistake even for people at their peak earning capacity.

astrid,

What makes you think that a national financial crisis severe enough to enable a reduction or elimination of federal tax deferrment on 401k/SEp/IRAs won't also impact Roth IRAs? Congress can rewrite the tax code as they see fit --and retroactively if necessary. Your Roth "rate lock" today may become tomorrow's potential 'cash cow' for politicians to mine. Never underestimate the collective political power of two enormous generations of wanna-be-rich retirees (Boomer+Silent) and their need for immediate self-gratification at any cost (to other people, that is).