4 ms·

No you're paying rent. The idea that property tax is passed down to renters 1:1 is just something you made up. The concept you need to look into is called tax

by rcpt 5y ago

No you're paying rent. The idea that property tax is passed down to renters 1:1 is just something you made up. The concept you need to look into is called tax incidence: https://www.maxwell.syr.edu/uploadedFiles/cpr/efap/Notes%20on%20the%20Incidence%20of%20the%20Property%20Tax.pdf https://www.maxwell.syr.edu/uploadedFiles/cpr/efap/Notes%20o...

mullingitover 5y ago
I don't think I made up the idea that landlords generally don't lose money renting their property. Higher taxes might reduce their profits in a competitive market, but renters are still paying the property tax for the landlord. Tax incidence theory also leans pretty heavily on the assumption that there's healthy competition in the rental market. In most major cities that's a very unsafe assumption.
etchalon 5y ago
I'd be careful about drawing the conclusion about rent shifting on that paper you linked, which really just says Carroll and Yinger's 1994 paper was right. Carroll and Yinger's paper is not unchallenged in economics (there are so very, very many papers on the problem), and it's entire line of reasoning is basically: 1. Property owners make a lot of money and own a lot of property. 2. When you increase property taxes, people who own a lot of property pay a majority of that increase. 3. Rent prices don't immediately increase 1:1 when property taxes rise, based on one data set. Basically, property taxes are mostly paid by people who own property. Most property is lived in by the owner. So property taxes aren't regressive, since rich people end up paying the majority share. People have been trying to create a model for the impact of rent shifting since the 60s. No one has a good model yet. It's hard to model. If I sign a lease for 2000/mo, and the state increases property tax on the owner, the owner can't immediately increase my rent. Rents increases are generally governed by local laws. But over time, they can raise it, and it can be reset when the current occupants leave. So an owner's profit margin takes a hit when property taxes rise, and renters bare a smaller percent of the burden of the new tax than the absolute amount raised in the short term. Long term, renter's are still covering the owner's total cost of that property, otherwise the owner would be losing money on the property – which, if that were prevalent business practice, we wouldn't have that many landlords. So yes, renter's pay property tax.
- foota 5y ago
  Not one to one though, it sounds like you know what you're talking about but the markets are of course decoupled. Home owners would like to pass along the entirety of their property tax, but whether they can or not will depend on the rental market, possibly renters can't afford the extra amount of the property tax and so adding it all makes the rentals unattractive and so the homeowner can only pass on some of the tax.
ashtonkem 5y ago
It’s true that landlords don’t directly pass property taxes down; this is part of why taxes on rent are occasionally floated as a way to make being a landlord less profitable. But, definitionally your rent must cover the mortgage and property tax of the property you occupy, plus profit. If you rent is less than property tax and mortgage, the land lord is underwater and will soon sell to someone else who will charge more or evict you for remodeling.
- pandaman 5y ago
  It must not. "Being underwater" is a state that describes the value of your asset vs the loan. If your house is worth more than the mortgage balance then you cannot be underwater even if you don't rent it at all. In the current situation, when the realty appreciates at >10% per year (in Austin, at least) it's not a very smart decision to sell or renovate the house if you cannot find a tenant willing to cover all your expenses. For example: Zillow shows my house appreciating 10K per month, my mortgage+tax+insurance is 3K, assuming Zillow is in the right ballpark, it makes sense for me to keep the house even if I can't find tenants for 3K (similar houses in the area used to rent for 2K-3K last time I've checked).
  - ashtonkem 5y ago
    Yes, your landlord can rent out for a loss when the house is gaining double digit percentages per year, assuming they’re well capitalized[0]. But let’s be honest, how long can houses gain 10% per year? And how often do you really think landlords rent at a loss in such hot real estate markets? Under less insane circumstances, a land lord who is charging less for rent than the house costs to own is going broke. As a general rule most land lords rent to make a profit, and therefore won’t charge rent below the cost of ownership. 0 - A poorly capitalized land lord will still go broke in this circumstance, since they’ll eventually fail to pay their mortgage without refinancing.
    - pandaman 5y ago
      10% per year is not the threshold, as long as the cap gains are more than expenses it's profitable to lease at any amount >= 0. Before I moved to Austin I used to live in a ~1.5M house in Los Angeles, paying ~2K rent for 10 years or so. It's not relevant to the current discussion though. Right now rents are lower than mortgages in general so the assertion that the tenant pays all landlord's expenses is demonstrably false.

by rcpt 5y ago

mullingitover 5y ago

I don't think I made up the idea that landlords generally don't lose money renting their property. Higher taxes might reduce their profits in a competitive market, but renters are still paying the property tax for the landlord. Tax incidence theory also leans pretty heavily on the assumption that there's healthy competition in the rental market. In most major cities that's a very unsafe assumption.

etchalon 5y ago

I'd be careful about drawing the conclusion about rent shifting on that paper you linked, which really just says Carroll and Yinger's 1994 paper was right. Carroll and Yinger's paper is not unchallenged in economics (there are so very, very many papers on the problem), and it's entire line of reasoning is basically: 1. Property owners make a lot of money and own a lot of property. 2. When you increase property taxes, people who own a lot of property pay a majority of that increase. 3. Rent prices don't immediately increase 1:1 when property taxes rise, based on one data set. Basically, property taxes are mostly paid by people who own property. Most property is lived in by the owner. So property taxes aren't regressive, since rich people end up paying the majority share. People have been trying to create a model for the impact of rent shifting since the 60s. No one has a good model yet. It's hard to model. If I sign a lease for 2000/mo, and the state increases property tax on the owner, the owner can't immediately increase my rent. Rents increases are generally governed by local laws. But over time, they can raise it, and it can be reset when the current occupants leave. So an owner's profit margin takes a hit when property taxes rise, and renters bare a smaller percent of the burden of the new tax than the absolute amount raised in the short term. Long term, renter's are still covering the owner's total cost of that property, otherwise the owner would be losing money on the property – which, if that were prevalent business practice, we wouldn't have that many landlords. So yes, renter's pay property tax.

foota 5y ago
Not one to one though, it sounds like you know what you're talking about but the markets are of course decoupled. Home owners would like to pass along the entirety of their property tax, but whether they can or not will depend on the rental market, possibly renters can't afford the extra amount of the property tax and so adding it all makes the rentals unattractive and so the homeowner can only pass on some of the tax.

ashtonkem 5y ago

It’s true that landlords don’t directly pass property taxes down; this is part of why taxes on rent are occasionally floated as a way to make being a landlord less profitable. But, definitionally your rent must cover the mortgage and property tax of the property you occupy, plus profit. If you rent is less than property tax and mortgage, the land lord is underwater and will soon sell to someone else who will charge more or evict you for remodeling.

pandaman 5y ago
It must not. "Being underwater" is a state that describes the value of your asset vs the loan. If your house is worth more than the mortgage balance then you cannot be underwater even if you don't rent it at all. In the current situation, when the realty appreciates at >10% per year (in Austin, at least) it's not a very smart decision to sell or renovate the house if you cannot find a tenant willing to cover all your expenses. For example: Zillow shows my house appreciating 10K per month, my mortgage+tax+insurance is 3K, assuming Zillow is in the right ballpark, it makes sense for me to keep the house even if I can't find tenants for 3K (similar houses in the area used to rent for 2K-3K last time I've checked).
- ashtonkem 5y ago
  Yes, your landlord can rent out for a loss when the house is gaining double digit percentages per year, assuming they’re well capitalized[0]. But let’s be honest, how long can houses gain 10% per year? And how often do you really think landlords rent at a loss in such hot real estate markets? Under less insane circumstances, a land lord who is charging less for rent than the house costs to own is going broke. As a general rule most land lords rent to make a profit, and therefore won’t charge rent below the cost of ownership. 0 - A poorly capitalized land lord will still go broke in this circumstance, since they’ll eventually fail to pay their mortgage without refinancing.
  - pandaman 5y ago
    10% per year is not the threshold, as long as the cap gains are more than expenses it's profitable to lease at any amount >= 0. Before I moved to Austin I used to live in a ~1.5M house in Los Angeles, paying ~2K rent for 10 years or so. It's not relevant to the current discussion though. Right now rents are lower than mortgages in general so the assertion that the tenant pays all landlord's expenses is demonstrably false.