DID YOU KNOW
You Are Taxed on Inflation
In our Did You Know? blogs we provide readers with useful information that is generally not widely realized by inexperienced investors. In this edition we will discuss the concept that there is a tax on inflation that is highly controversial. These taxes are very deceiving, and in some cases unconstitutional, but often go unnoticed, and/or unchallenged, due to their complexities.
Many types of “inflation” results in higher taxes, such as food, gas, and essentially any item that qualifies for a sales tax. As the price of these items rise, the set sales tax percentage also results in a higher overall cost. More expensive items, such as new motor vehicles and other luxury items, also see an increase in costs. Recent talks of an “unrealized gains” tax threatened to cut into one’s home equity and/or investment holdings, even without a sale! Thankfully these rumors have subsided, at least for the time being.
One of, if not the largest culprit, however, is property taxes. When an individual/investor obtains an asset, including real estate, there are actually two separate measures of value:
The first is the market value, which is essentially set by the agreed to purchase price between the buyer and seller. Although other homes in the area may help set the “average” sales price, the current value, or market, for that specific property, is adjusted to the purchase price each time the property is sold. This is generally consistent with any free and open market, as the value is the highest amount someone is willing to pay for the product.
However, due to the recent “bidding wars” (2021-2023) for properties, a perceived “rise” in home values has been created by what real estate professionals refer to as “Comps.” Comps is short for Market Comparisons, which is a popular tool used when pricing a home to list it for sale. This price is derived from recent sales (usually about 6 months), within a specified distance (usually about 1-2 miles), for comparable properties. Hence, when individuals drive up the price by outbidding each other, the final sales price gets recorded, and raises that “average” price of area homes. Regardless of the condition of the property, the need for new systems, or the mortgage rate, the “market” then continues to go higher.
The second type is the assessed value, which is determined by the taxing entity of said property location, usually the official town or city tax assessor’s office. This is where the “value” is subjective, and often questionable or even fraudulent. Eventually, usually within a year or two, a new appraisal is conducted by the local taxing entity for homes in their jurisdiction, resulting in a rise of the property taxes. This is where inflation, and possible fraud is taking placed in many counties and districts, as the tax hike is essentially an unrealized gains tax, especially for those in the neighborhood who have not sold their home. This type of increase in property taxes is not determined by improvements or additions to the property, and technically are only perceived. There is no discount if the property is sold at under “market” value, and the property owner will be in default and at risk of a “tax sale” if they don’t make timely payments. Recently, some law suits have been filed regarding this matter, in Texas and other locations, which we will discuss in next month’s Real Estate blog.
There are always inherent risks to owning property, including unforeseen repairs, weather damage, rising insurance costs, new government regulations, or simply the inability to pay the mortgage, which we have discussed in previous blogs and our publication.
Whenever contemplating large purchases or investments, speak with someone who is experienced, do your own due diligence, and question everything the “seller” or “salesperson” pitches. Unassuming or trusting buyers often get taken advantage of, and can easily lose their hard-earned capital.
