Tag Archives: property tax

Long-Term Homeownership Affordability

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Amnon Lehavi has posted Can the Resale Housing Market Be Split to Facilitate Long-Term Affordability? to SSRN.  The paper argues that

a comprehensive affordable housing policy requires the formal splitting of the homeownership market into (at least) two distinct segments: one designated for the general public and following a conventional pricing mechanism through free market supply and demand, and the other designated for eligible households and controlling both initial supply and subsequent resale of housing units through regulated affordability-oriented pricing mechanisms.

While regulation of the pricing of affordable housing units during their initial allocation is a standard feature of housing policy–whether such affordable units are produced by a public authority or a private developer–regulation of pricing upon resale to subsequent buyers has received less attention as a matter of both theory and practice, thus leaving a substantial gap in

design mechanisms aimed at promoting a sustainable affordable housing policy.(1)

This is not really a new argument, but the paper takes the position that existing efforts to regulate resales of affordable housing in the homeownership market can be scaled up significantly. The paper does not take on some of the bigger questions that this position implicates — for instance, should scarce homeownership dollars be spent on rental housing instead — but it does develop a concrete proposal:

This paper seeks to enrich policy design options by introducing two alternative cap-on-resale mechanisms for the affordable housing segment: “Mixed Indexed Cap” (MIC) and “Pure Indexed Cap” (PIC). It explains how such models could be utilized to attain a policy goal of promoting long-term social mobility, allowing multiple low- and modest-income households to engage in capital building by sequentially enjoying increments of appreciation of properties in the affordable housing segment.

In so doing, the paper addresses a series of challenges posed by the design of a cap-on-resale mechanism: Could such a mechanism ensure that the homeowner is granted a fair return upon resale, providing the owner with proper incentives to invest efficiently in the property during the tenure, while setting up a resale rate that would make the unit truly affordable for future homebuyers? (1)

New York Ciy has experimented with affordable homeownership and has not come up with an ideal solution to the problem of affordability upon resale. Given the renewed focus on affordable housing policy in NYC, this attention to affordable homeownership policy is most welcome.

Reforming NYC’s Property Tax Regime

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Andrew Hayashi has posted Property Taxes and Their Limits: Evidence from New York City to SSRN. There probably could not be a more obscure and dull topic than this to the general reader (and coming from me, as the author of this blog, that is saying something!). But for those of us who think about such things, this is an incredibly important topic that is at its heart fundamentally about fairness and treating like people alike.

Hayashi argues that

The property tax is the largest source of tax revenue for local governments. It is also an almost irresistible policy instrument for municipalities, which typically do not have control over any other tax with which to influence the urban landscape and the local distribution of income and wealth. The widespread use of the property tax for planning and redistribution means that virtually no jurisdiction straightforwardly calculates the tax liability for a property as a fixed percentage of its market value. Instead, property tax rates tend to vary with the use to which a property is put or the identity of its owner. As a consequence, many of the potential benefits of the property tax, such as ease of administration, transparency, the clear reflection of the costs and benefits of local services, and the intuitive fairness of imposing taxes in proportion to property wealth, are lost. (2, footnotes omitted)

He concludes

The property tax is a hated tax, but attempts to curtail its most offensive feature, the rapid increase in taxes that can accompany paper gains in property value, have had unintended distributional consequences that are hard to justify on policy grounds. In New York City, the caps are regressive and tend to benefit new homebuyers and sellers rather than current homeowners on fixed incomes. The caps should be replaced with a property tax circuit breaker [that limits increases for lower-income homeowners] or deferral system [that delays full payment until the property is conveyed]. (27)

This issue is even bigger than these selections suggest as there are big disparities in the tax burden among different types of property. For example similarly priced single family homes have a lower tax burden than coops or condos in multifamily properties. NYU’s Furman Center (with which Hayashi is affiliated) has studied these issues and, even better, has highlighted them as part of the De Blasio transition.

Property tax fairness is not a Republican or a Democratic issue — it is a good government issue. Hopefully, the De Blasio  Department of Finance will take up this obscure but important issue. Fairness demands it.

Reiss on “Sexy Tax Breaks” for Luxury Housing

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MainStreet.com quoted me in Luxury Real Estate with Sexy Tax Breaks. The story reads in part,

Buying a high end property doesn’t always cost a fortune for the wealthy especially if there are tax breaks attached.

Property tax deductions and even exemptions exist for buyers of luxury properties under special incentives, such as New York City’s J-51 and 421a program.

“A J-51 unit in a luxury building will likely sell for more than a comparable condo without a tax break, because monthly expenses are lower due to reduced property taxes. It’s a deal but not dollar for dollar, and that’s true everywhere you look for tax breaks in luxury properties,” said David Reiss, professor of real estate law at Brooklyn Law School.Benefits include no tax by reducing the assessed value of the property to the pre-renovated price and secondly by capping property taxes.

“These benefits phase out typically over a 14 year period for market rate properties,” Reiss told MainStreet.

Most J-51 buildings in the borough of Manhattan are above 110 Street due to state restrictions.

For example, for interested buyers there’s a two-bedroom J-51 condominum on West 140th Street available for $620,000 advertised on condo-living-west.com.

“The tax reduction will be priced into the cost of the home,” said Reiss.

A back end strategy would be to buy and sell early rather than buy early and sell late to make a profit after purchase.

“Because the closer you are to the 14 year phase out when you sell, the less of a benefit the tax break is to the owners’ sale price,” Reiss said.

The 421a program is another tax break available for new construction not rehabilitation or conversion of existing buildings in Manhattan.

For example, an owner in a $90 million duplex penthouse in Midtown Manhattan would normally pay $230,000 in taxes without an abatement and $20,000 in taxes under an abatement program.

About 150,000 units in New York City receive partial tax exemptions under 421a.

The downside is that taxes gradually go up as the abatement is phased out.