Replace All Federal Taxes on Income with the Fair Tax Act , HR 25 and S 122

Why is real property included as taxable?

Why is real property included as taxable? I can’t find any state other than Washington that has any tax on the sale of real estate, and Washington’s tax rate on this activity is only 0.0128. Real property has universally been treated differently than tangible property, and I’m concerned of the impact this will have on the housing market in terms of sudden equity in used homes while crushing new home construction and the jobs that depend directly and indirectly upon it. I think in the last few years we’ve seen what happens when the housing market struggles and the far-reaching ripple effects. If education is exempted as an investment in the future, so should be home ownership. Being 30% upside down on an investment from day one is difficult to accept. Incidentally, I’m fine with tax on housing rent...I think that’s fully appropriate whether it’s a motel room or an apartment or a mansion. Perhaps I should create a property management business to buy the new house (exempt from tax) and rent it to my family for $1 a year.

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Permalink Reply by Ron Wenrich on January 22, 2011 at 7:05am

What would you call a real estate transfer tax? Its levied by states, counties, and municipalities. And that's on property, which includes raw land. Only 13 states do not have a transfer tax.

I'm not sure if the Fair Tax would exempt that portion of previously owned land from the sale of a new house.

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Permalink Reply by MrGadget on January 22, 2011 at 9:08am

Based on this data http://www.ncsl.org/default.aspx?tabid=12661 from Aug 2008:

40 States have some sort of Transfer Tax
31 (over 75%) have rates equal or less than 0.5%
Only two may exceed 2% under certain circumstances (punishing success)
There may be exemptions for "first time buyers"

These are administrative fees to offset recording the change of ownership (albeit abusively applied in my view, but that's another topic), and pale in comparison to the rate proposed under FairTax.

Like you, I cannot find any language in the bill that discusses how to deal with a new home on "used land" such as a farm converted into a housing development.

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Permalink Reply by Joe McCune on January 22, 2011 at 10:20am

MrGadget said,

"Why is real property included as taxable?"

The short answer would be that there are no taxes paid on the materials, supplies or labor used in the construction of a new house, unlike what you have today under the Income Tax. Therefore the government collects all that missing tax revenue by collecting the FairTax at the time of sale to the end user.

"Being 30% upside down on an investment from day one is difficult to accept."

I don't accept the premise of that statement as the house will be sold for what it is worth in the free market economy, unless the buyer is a complete imbecile or accepts poor and/or bogus advice.

Would the value of used homes rise? Perhaps, but I do not believe it would be any worse than the rise of housing costs over the last decade, at the end of which, many homeowners ended up upside down by more than the 30% that you assume the FairTax on housing would leave you from the get go.

As for your plan to cheat the system, I believe there will be enough oversight, that when you buy a house for $200K as a rental property, and then pay tax on the rent of $1 a year, red flags will fly, and you will soon be wearing an orange jumpsuit.

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Permalink Reply by MrGadget on January 22, 2011 at 12:16pm

My "plan to cheat the system" was a bit tongue-in-cheek of course...such a business wouldn't survive the ongoing year over year loss reporting, among other things.

It seems there is a huge assumption that in the 12-24 month interim between enactment and the effective date all "tax-burdened" materials would need to flush out of the economy at all levels from raw materials to finished components (wiring, plumbing, fixtures, etc.) and that all points of the chain would mutually agree to adjust down their prices accordingly, and I remain sceptical that this will completely happen. Nonetheless, there is a transitional inventory tax credit available to "unpenalize" new goods sold in the first year carried over from prior to the effective date.

If new buildings are to be taxed, I still maintain that used buildings should also be, simply because taxing more stuff should mean a lower rate across all the stuff.

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Permalink Reply by chiefcook on January 22, 2011 at 3:29pm

You are going to have to explain why the federal government should be allowed to tax the American people over and over again on the same property? I believe ONCE is enough.

Keep in mind that the FairTax only applies to "new goods and services at the retail level." We are talking about the purchase of an individuals personal residence. When an individual moves from one residence to a replacement residence, they have a choice to buy a pre-existing home and pay no tax on the purchase or to buy a newly constructed dwelling (or a dwelling used for business purposes that has not had federal taxes paid on it) and therefore pay the FairTax.

Buildings constructed for commercial use whether they are newly constructed or an existing building being purchased would not be subject to the FairTax. This includes apartments that are business use for rental properties. The residential rental homes are subject to the FairTax on the monthly rental fees as this is a service.

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Permalink Reply by MrGadget on January 22, 2011 at 6:40pm

I'll refer the discussion on whether used goods should be taxed to here:

http://www.fairtaxnation.com/forum/topics/why-is-real-property-incl...

...to avoid fracturing the discussion and keep this thread on point of whether real property should be taxed or not.

On that point, I cannot find language in the bill that addresses used land with a new house, nor the case of a property where the house is razed due to age or damage and a new structure built in place, nor change in use of a property, such as an individual buying several tiny inner city adjacent properties, clearing all the structures, and building a large residence in their place. The latter case has happened a lot in urban recovery efforts, as the old original houses were tiny and built tight together...two or three into one was fairly common.

This is by no means an exhaustive list of scenerios, but rather a scratch at the surface as to how taxing of real estate sales can get very complex.

At the very least, one might make the argument that two elements of FairTax are in conflict in this area, as the consuming public generally considers real property as an investment and want exclusion on that basis.

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Permalink Reply by Ron Wenrich on January 22, 2011 at 9:42pm

What's to prevent a company to build a house as a business, and paying no tax, flip it and sell it as a residence and pocket the difference? It seems that a tax should be paid when it goes from business to residential.

On the flip side, would a business get a rebate if they bought a home and turned it into a business? Or, where a business buys a home and turns it into a rental property.

Any law that has loopholes will find that people will go to it as an advantage over the rest of the crowd.

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Permalink Reply by chiefcook on January 22, 2011 at 10:35pm

When a house is built for a rental property (business use) FairTax would be collectible on the rental income each month from the consumer/resident. Later the business could update (flip) the property and sell it to the consumer. The sale price at retail (first time retail sale) would be subject to the FairTax (assuming it was built after the FairTax was passed) If building was built under Income Tax rules, the FairTax would not apply.

This is the same concept as an auto rental company that puts a new car in their fleet for six months and then sells it. They collect the FairTax on the rental fees and then the sale price of the auto at retail. The value of the auto is lower as it has been driven driven for six months.

Businesses do not pay the FairTax on business use purchases and there is no FairTax on used goods anyway, therefore no rebate is needed.

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Permalink Reply by MrGadget on January 22, 2011 at 8:34pm

To be clear, my position is that no real property should be taxable.

As an added justification, mortgage interest above the applicable Federal published rates will be taxable, regardless of whether the home was new or not, burdening home ownership even more.

See http://evans-legal.com/dan/afr.html for current Long Term Rates. Whatever your current mortgage rate is above these will produce taxable interest regardless of whether the home was new or not.

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Permalink Reply by chiefcook on January 22, 2011 at 9:42pm

The business providing the mortgage loan is providing a service. If this service is on a residential property, this is subject to the FairTax. The FairTax is not on the real property, but rather the service of the availability of the loan. If an individual pays cash, this service is not required.

The real property is not what is being taxed. It is rather the purchase of the products that go into the construction of the home and the services of the contractor and subcontractors that did the actual construction work. This is the same as the purchase of a auto that has been restored. The buyer is paying for the materials and services that go into the restoration process and this is what is subject to the FairTax.

There is some question into how does one determine the value of the "land value" or "auto before rebuilding process" vs the improvement of the purchase value of these by the entity responsible for the task completed. You might consider these details that are not directly addressed in the actual FairTax bill. There is always things that are not in the law, but are worked out later.