Renters Should Pay More Taxes

Dream House In Kahala, Oahu, HawaiiEvery winter and spring, millions of homeowners across America pay their property taxes. In California, homeowners have to fork over roughly 1.2% of the assessed value every year to the local government. Put it another way,  in 83 years, a homeowner will have paid 100% the value of his or her home in taxes! How sick is that?

It is the American way for all citizens to pay their taxes, except for the many who don’t. We know by now that the often cited “47%” are the elderly or those who make under $20,000 so that’s fine. If you are one of them, just don’t vote to raise taxes on the 53% who already pay 100% of all federal income taxes please! Let’s all pitch in or starve the beast instead.

So why is it that homeowners, many of whom initially struggle to pay their mortgages, have to pay extra taxes while renters don’t? Let’s explore and discuss, shall we?

RENTERS VS HOMEOWNERS: A WRONGLY PERCEIVED CLASS DIFFERENTIAL

The clearest reason why homeowners have to pay property taxes while renters don’t have to pay renter taxes is because the government perceives homeowners as Lords! The word “landlord” makes it very clear that homeowners are considered the superior class. Back in the old days, peasants had to toil in the fields to pay for shelter. They couldn’t even afford regular food, let alone pay extra in taxes to help build schools and maintain roads.

Hundreds of years later, it’s odd that this archaic term and concept still holds true, even though America has grown to become the wealthiest nation in the world.  For anybody to equate renter to poverty is just ludicrous. Sure, there are some studies that show that the average net worth for a homeowner is 40X greater than that of a renter ($160,000 vs. $4,000). But overall, many more Americans nowadays rent out of choice, not out of insufficient funds.

SPREAD THE PROPERTY TAX PAIN FOR ALL

With a typical $700,000 home in San Francisco, the homeowner is paying around $8,000 a year to the city to fund schools and maintain public infrastructure projects. That’s $8,000 more than a renter pays, yet both the homeowner and the renter enjoy the same benefits. Clearly, this is unfair.

Just looking at my bill, I see $50 going to the SFUSD (I have no idea what the hell this is), and another $205 going to “teacher’s support”, even though I don’t have kids in public school. Supposedly, a couple thousand of my property tax is going to be used to build a bullet train from San Francisco to LA too. Sweet! I’m really going to be riding that in 2020 when it’s done? No, because we all know the project won’t be done until 2030 at the earliest!

Some renters argue that homeowners got it good already with the mortgage interest deduction of up to $1,100,000. In other words, if my interest rate is 5%, I can reduce my taxable income by $55,000. Well I say $1,100,000 is not enough! The figure is totally arbitrary, and should be raised by at least double to $2,200,000. It takes a lot of work to be able to save up 20% for a downpayment on a house and have 10% left over as a buffer in my 30/30/3 rule.  Homeowners therefore deserve a reward for their fiscal discipline, rather than be punished with more taxation.

EQUALITY FOR RENTERS & HOMEOWNERS MAKES EVERYTHING SO EASY

I’m a big believer in equality, and therefore I believe renters should pay a “Renter Tax”. To calculate an equitable way to tax renters, what we do is capitalize the annual rent by a normal risk free rate of say 4%.  Say for example you pay $24,000 a year in rent.  Divide $24,000 by 4% and you get $600,000. The $600,000 is the basis where you as a renter will pay 1.2% ($7,200) every year to the city, to also pitch in and support the schools and roads.

The Renter Tax proposition is a brilliant way to shore up any budget deficit the city or state may have, while creating a fair scenario for all people. Let’s create an environment where everybody proudly pitches in to ensure a harmoniously great nation for all our children! And most of all, let’s change the perception that renters are lower class citizens and tax renters just as much as homeowners. Equality for all!

Goal: If you are a renter, are you sufficiently frustrated yet? The goal of this post is to recreate the frustration and anger homeowners and certain income groups feel for having to pay more taxes. It’s understandable to vote on legislation to spend more of other people’s money for your own benefit. However, in the long run, you just end up hurting yourself because rents will increase to reflect increased expenditure by way of property taxes. If you want more spending, please also agree to pay more taxes as well. It is wrong to raise taxes on one group of people without having to pay more yourself.

Recommendations For Building Your Wealth

For Homeowners And Renters: Get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going. Their free 401(k) Fee Analyzer tool everyone should run is also saving me over $1,500 a year in portfolio fees I had no idea I was even paying! There is no better free tool online that has helped me achieve financial independence. It only takes a minute to sign up.

Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. Interest rates are at all-time lows in 2015 due to tremendous volatility and unrest in the markets. When banks compete, you win.

Renters: Many landlords now require a credit score and report during the application process. Take a moment to check your free credit score through GoFreeCredit.com. 30% of all credit records have errors which can derail your chances of finding your perfect place. Know your score so you can improve your score. I had a $8 late payment from two years ago which slammed my credit score by 100 points! A credit score check also makes sure you aren’t a victim of identity theft.

Updated 1/20/2015

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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Comments

  1. $iddhartha says

    This is not an endorsement of the common property tax scheme, but I turned this fact to my advantage by buying a home under the median value for my area. I pay half the interest and half the property tax relative to my peers who borrowed twice as much. Although I get a slightly lower income tax deduction, I don’t consider it to be a significant factor relative to the amount I save.

    Also, I purposefully bought in an area that is known for good local schools. Otherwise, in the city I work, my kids would’ve faced a lottery to get into the good schools. Funny how government structure can have great influence on such important life decisions.

  2. estaban says

    You seem to miss one important thing about property taxes. If a person is renting they then pay the landlord. the landlord then pays property taxes. The renter’s property taxes are then baked into the rent they pay. Renters do in fact pay property taxes through the landlords.

    I am both a renter (primary home) and a homeowner (rental property) I do pay my FAIR share of property taxes. I charge my renter more because of property taxes and my landlord asks more rent because of property taxes.

    Your “goal” cracks me up. First off, find me a study where renters are demanding property owners to pay more taxes? Second, find me a study saying renters don’t expect rents to rise because of higher property taxes.

    I love your site and I’ve gleaned some great advice from it but stick to the facts and don’t look down on those who you think pay “less” taxes.

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