"A 1.2% property tax applied to a home purchased at a typical 6% cap rate (that is, a home that each year is returning 6% of purchase price in income or saved rent) is effectively the same as applying an income tax of 20%."
I am trying to make sure that I understand this. I get the math as a % of net income but then you are also taxed on …
"A 1.2% property tax applied to a home purchased at a typical 6% cap rate (that is, a home that each year is returning 6% of purchase price in income or saved rent) is effectively the same as applying an income tax of 20%."
I am trying to make sure that I understand this. I get the math as a % of net income but then you are also taxed on net rent at ordinary income level right? But then you also are allowed to deduct mortgage interest and depreciation expense that wouldn't show up in the cap rate equation and even carryforward losses? That could mean that a landlord could be deducting/deferring tax at effective tax rate for the year near 0%, no?
This paragraph is just referring to owner-occupied properties, so it only applies if you're living in your own home. In the owner-occupied case you can more or less just imagine bonds that yield 6% - in that case you should be indifferent between a 1.2% wealth tax on your bonds or a 20% income tax. Maybe the use of "cap rate" was a bit confusing in that sentence since it does have a specific meaning.
It gets more complicated in the case where you are a landlord, because as you say, you are subject to some reduced income taxes as well. Even in that case, the general point applies - landlords in every other state pays full property tax and they are fine, because property tax at this level isn't that punitive.
There is a legitimate argument that we shouldn't discourage housing construction, and property tax is a tax on new housing, so maybe we should have a credit for improved buildings or something of that sort (land tax solves this etc) but that doesn't apply currently in California, where housing development is almost impossible and there are other, much larger taxes on new development.
"A 1.2% property tax applied to a home purchased at a typical 6% cap rate (that is, a home that each year is returning 6% of purchase price in income or saved rent) is effectively the same as applying an income tax of 20%."
I am trying to make sure that I understand this. I get the math as a % of net income but then you are also taxed on net rent at ordinary income level right? But then you also are allowed to deduct mortgage interest and depreciation expense that wouldn't show up in the cap rate equation and even carryforward losses? That could mean that a landlord could be deducting/deferring tax at effective tax rate for the year near 0%, no?
This paragraph is just referring to owner-occupied properties, so it only applies if you're living in your own home. In the owner-occupied case you can more or less just imagine bonds that yield 6% - in that case you should be indifferent between a 1.2% wealth tax on your bonds or a 20% income tax. Maybe the use of "cap rate" was a bit confusing in that sentence since it does have a specific meaning.
It gets more complicated in the case where you are a landlord, because as you say, you are subject to some reduced income taxes as well. Even in that case, the general point applies - landlords in every other state pays full property tax and they are fine, because property tax at this level isn't that punitive.
There is a legitimate argument that we shouldn't discourage housing construction, and property tax is a tax on new housing, so maybe we should have a credit for improved buildings or something of that sort (land tax solves this etc) but that doesn't apply currently in California, where housing development is almost impossible and there are other, much larger taxes on new development.