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| I must be missing something here. If one is in the rental business, |then I can’t see how interest is a tax deduction. It’s a business expense. Yes you are missing something. You are assuming that all business expenses are automatically also tax deductions. They are not. Check the tax codes. There are many things that businesses spend money on that they are not allowed to deduct. This list grows every year. — Mob rule isn’t any prettier merely because the mob calls itself a government It ain’t charity if you are using someone else’s money. Wilson’s theory of relativity: If you go back far enough, we’re all related.
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: | I must be missing something here. If one is in the rental business, : |then I can’t see how interest is a tax deduction. It’s a business expense. : Yes you are missing something. You are assuming that all business expenses : are automatically also tax deductions. They are not. Businesses pay federal income tax on profits. Business expenses reduce profit and therefore tax burden. Interest is a business expense. It has the effect of reducing profit and hence taxes. — Lee Devlin | HP Little Falls Site | phone: (302) 633-8697 | 2850 Centerville Rd. | email:
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|: | I must be missing something here. If one is in the rental business, |: |then I can’t see how interest is a tax deduction. It’s a business expense. |: Yes you are missing something. You are assuming that all business expenses |: are automatically also tax deductions. They are not. |Businesses pay federal income tax on profits. Business expenses reduce |profit and therefore tax burden. |Interest is a business expense. It has the effect of reducing profit |and hence taxes. If the IRS declares that mortgage payments are no longer a legitimate deduction, then they can no longer be used to reduce net income for tax purposes. Not all expenses are deductions. — Mob rule isn’t any prettier merely because the mob calls itself a government It ain’t charity if you are using someone else’s money. Wilson’s theory of relativity: If you go back far enough, we’re all related.
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>Now the real question which you so adroitly avoided is if the landlord is >no longer able to deduct interest payments, in your example $600/month, >his monthly expenses will go up, in your example by $90/month. >What will this additional expense cause the landlord to do? >If you answer, he will raise your rent by $90/month, than you get an >A in economics.
No, only a B, since the landlord still has to compete with home ownership he will not be able to recover the full $90. He may decide, instead, to turn the building into a parking garage. Or sell it as Condos, or let it go to seed. In other words, he may *share* the hit, or he may make some totally different move with his assets. – - Michael Michael S. Alexander (A.K.A.) Rednaxela (612) 296-2304 (Work) (612) 644-4817 (Home)
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PLEASE take this to talk.econ or somewhere. It costs me money to download news, and this ain’t interesting. — Paul Clark of Systems Magic Ltd, Cambridge, England | +44/0 223 566060 *** Suggestion for a new ’smiley’: _||_ (pronounced bow, rhymes cow) *** *** = palms together bow = Please accept my opinions, humbly presented. ***
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>A renter pays more than an owner for the same thing. You obviously >don’t agree with me because you are the God-of-all-economists. The fact >is, if landords were taking a loss, they wouldn’t be doing it. You
>obviously aren’t a very good economist if you are taking a loss with your >rental properties and aren’t doing anything about it.
Ugh. The concept of property squarely targeted to generate a loss (which can be nicely used to offset other income) never occured to you? In the 80’s many people got into these ‘real estate limited partnerships to develop low-income housing’ knowing well in advance they’d get screwed. Don’t know if the tax breaks are still there or if the holes were closed. Spiros — Spiros Triantafyllopoulos Kokomo, IN 46904 (317) 451-0815 Delco Electronics/GM Hughes Electronics [A Different Kind of Disclaimer]
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– Hide quoted text — Show quoted text -> I must be missing something here. If one is in the rental business, >then I can’t see how interest is a tax deduction. It’s a business expense. >Thus, in computing the profit from his rental business, the owner would >deduct vaious costs from his revenues to calculate profit. Among these >costs (various O&M expenditures, for example) would be the interest he >paid on the house itself. As a result, the owner wouldn’t pay taxes >on the interest any more than he would pay taxes on the office supplies >expense he incurred to run his business. Still, this would not constitute >a "tax deduction" for interest. In order for this owner to lose interest >as a "tax deduction", the IRS would have to conclude that interest was >no longer a legitimate business expense, something that america’s business >community would fight against vigorously–and properly, I might add. >So, how do we propose that landlords "lose their interest tax deduction" >when they don’t really have a "deduction" in the first place. We’re thinking >like home owning, individual taxpayers here, not like businessmen. Let’s >get our logic sorted out…or have I missed something.
You missed something. Business expenses ARE tax deductions in the same fashion that mortgage interest payments are "business deductions" to the individual who is engaged in the "business" of living. In both cases, the expenses offset income in computing the taxable net. In both cases the government specifies what is and is not deductable. For the individual, mortgage interest is, credit card interest isn’t. For the business, mortgage interest is, part of entertainment expenses are not. It’s all the same game and that is, which special interest has enough congressional suction to protect its underbelly. Homeowners do; evil assault, baby-killing businesssmen don’t, for the most part. John — Performance Engineering Magazine. Email to me published at my sole discretion Happiness is Clinton’s picture on the side of a milk carton.
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|> >>>Tell me Eric, are you honestly trying to claim that if the landlord were |> >>>not able to deduct his interest payments, than he would not raise your rent. |> >>>And you want anyone else to take you seriously. |> > I must be missing something here. If one is in the rental business, then I can’t see how interest is a tax deduction. It’s a business expense. Thus, in computing the profit from his rental business, the owner would deduct vaious costs from his revenues to calculate profit. Among these costs (various O&M expenditures, for example) would be the interest he paid on the house itself. As a result, the owner wouldn’t pay taxes on the interest any more than he would pay taxes on the office supplies expense he incurred to run his business. Still, this would not constitute a "tax deduction" for interest. In order for this owner to lose interest as a "tax deduction", the IRS would have to conclude that interest was no longer a legitimate business expense, something that america’s business community would fight against vigorously–and properly, I might add. So, how do we propose that landlords "lose their interest tax deduction" when they don’t really have a "deduction" in the first place. We’re thinking like home owning, individual taxpayers here, not like businessmen. Let’s get our logic sorted out…or have I missed something. Francis Ferguson
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|:Now the real question which you so adroitly avoided is if the landlord is |:no longer able to deduct interest payments, in your example $600/month, |:his monthly expenses will go up, in your example by $90/month. |:What will this additional expense cause the landlord to do? |: |:If you answer, he will raise your rent by $90/month, than you get an |:A in economics. | |You don’t know what the hell you are talking about. Pardon my french, but I do so know what I am talking about. |In essense, the landlord runs a business. He only gets taxed on business |profits, so of course he gets to deduct all of his expenses. NO he doesn’t, he only gets to deduct what the IRS says he can deduct. In no way shape or form does this include all expenses. |So he |deducts the mortgage interest, as well as the mortgage principal, |because it is a business expense. Now lets assume there was no mortgage |interest deduction. He still will deduct the mortgage interest and all |other expenses because it is a business and he is only taxed on profits. Excuse me, but your statement is internally inconsistant. If the IRS says that the business man cannot deduct mortgage interest, than he can’t deduct mortgage interest, period. Your confusion rests on the definition of profit. Now the average person considers profit to be the differences between income and expenses. But the IRS on the other hand considers profit to be the difference between non-exempt income and allowable deductions. Because of this it is possible to have income, yet owe no taxes (non-taxable bonds for instance). It is also possible to loose money, yet still owe taxes. |To say that he wouldn’t be able to deduct this without the mortgage |interest deduction is like saying that a manufacturing business couldn’t |deduct the cost of their factory from their gross income. If the IRS says that you can’t deduct the cost of the factory, than you can’t. Remember, they’re the government, they don’t have to make sense. |You’re now going to say "see, renters are getting a better deal". I already have. Everyplace I have ever lived. The cost of renting has always been below the cost of owning. |That’s is BS. Look at the figures in my previous post. The fact remains |if a house is "worth" a $1000 a month, the owner will pay $1000 and |deduct the interest. The landlord pays a $1000 mortgage and deducts all of it |as business expenses and rents it for $1000 (thereby making no profits). Except as has been pointed out, the landlord cannot deduct principal. If you know of any landlords who are doing this, would you please send me their names and addresses. The IRS’s whistleblower reward would come in handy right about now. |The renter pays $1000, to cover the landlords cost’s, but gets to deduct |nothing. The owner will always pay less in taxes than the landlord/renter, |because the landlord is a middle-man. The more middle-men, the more |taxes paid. Sometimes yes, sometimes no. |It is a very simple principle. Unfortunately it has been simplified beyond recognition. |The IRS taxes a transaction. No, the IRS taxes income, and sometimes property. |A landowner pays taxes when a mining company buys their land, Only if he sells it for more than he bought it. If he sells it for the same amount there is no tax. If he sells for a lose, he has a capital loss that can be applied to offset other capital gains. |who then pays taxes when a steel manufacturer buys their ore, The entity that saw the capital gain. |who then pays taxes when an auto manufacturer buys their steel, The entity that saw the capital gain. |who then pays taxes when a consumer buys their car. The entity that saw the capital gain. |The consumer already paid taxes on their income, and their |company paid taxes for … Ultimately it is the consumer that pays all of those taxes, because any cost of business will eventually be passed on to the consumer. |A home owner buys a house; 1 transaction. A |landlord buys a house and then rents it out; 2 transactions. Except as has been pointed out. The IRS does not tax transactions. |If you can’t see this and do the simple math, you need to take a basic |math course as well as getting a trade-in on your brain. I have done the math. Your model is faulty because it does not reflect reality. |The mortgage interest deduction is the biggest subsidy |in this country. I’m sick of all the middle-class bellyaching about |taxes and the government because they get the biggest "welfare" of all. I’m sick and tired of whining crybabies who think that allowing people to keep some of the money that they earn, constitutes welfare. — Mob rule isn’t any prettier merely because the mob calls itself a government It ain’t charity if you are using someone else’s money. Wilson’s theory of relativity: If you go back far enough, we’re all related.
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>:I don’t get to deduct my home office. >Some home offices are deductable is you are really running a >business from there, and that is all that it is used for.
You obviously havn’t got a clue. Yeah, you can ‘deduct’ it. It will also GUARANTEE you an audit if you do. You will then spend far more cash money defending your ‘right’ than the deduction could ever be worth. My CPA, who will represent me in any audit and assures that everything I do is legitimate, has advised me not to bother with the home office deduction since the IRS has DECIDED they DON’T LIKE IT and are TARGETING ALL OF THEM. The law is not nearly as important as what the IRS does and does not like. It is a rational business decision to roll over and play dead, give the robbers what they want, and not take the legal, but stupid if you take it, deduction. This is called extortion, unless done by the government, then it is called ’selective enforcement’. >You probably use it to watch TV because you can’t agree with your >wife on a TV program.
It is a very poor debate tactic to assert that which you can not know. The home office we have contains the business licence for ‘The TypeSmith’ (my Wife’s home business), 3 four drawer file cabinets full of business filing, the business computers, the business phone line, two desks full only of business materials, and a stack of storage boxes filled with business stuff, one set of shelving, and a couple of (non-deducted) pictures on the wall. We watch TV in the living room. If the kids don’t agree with the wife and me, we move to the master bedroom where we watch the OTHER color TV. If my wife doesn’t agree with me (and the kids have taken the living room) I use my personal portable color TV. If all four of us want to watch something different, one of the kids gets to either watch the B&W tv in their room, or we run one of the 4 VCRs as a tuner and drive their color monitor for THEIR computer as a tv in their room. Yes, we have 4 people, 4 VCRs, 4 PERSONAL computers, and 2 BUSINESS computers. There is NO recreation of any kind nor any kind of non-business activity done in the business office. IF the IRS ever audits me, then I’m going to be positioned to drag that office deduction out of the back pocket and use it as a counter point to whatever they dream up… I want it to be a squeaky clean record at that point. >It would probably flag an audit because most people >who try an claim a home office don’t really use it as an office.
It DOES flag an audit because the IRS wanted more money and it is easier to target a legitimate deduction and harrass folks into dropping it out of fear than it is to change the law. You will learn about this if you ever earn any money. >:I don’t get to deduct any old business >:lunch either, and only 1/2 of the ones the IRS decides I really needed >:to conduct. >You would eat lunch anyway so why should you be able to deduct it. I
YOU were the one who asserted that any ‘business expense’ was a deductable item, not me. If I take a client to lunch to try to convince them to buy, that is far more costly to me than the salami sandwich presently sitting in my paper sack on my desk. It IS a ‘business expense’, just not a deductable one (as you asserted they all were…) >remember my dad taking us out to lunch and deducting it as a business >lunch. The fact is *maybe*, at the most, half of the "business" lunches >really are.
So, your dad commits fraud therefor all other folks should be shot. Great logic. >:the principal was NOT deductable >my mistake, I was thinking of the deductable depreciation. >:If the ‘mortgage interest deduction’ is GONE, it is GONE. >:You don’t get to magically just roll it back in again as a ‘business >:deduction’ >Yes and no. The "mortgage interest deduction" referred to is for >personal residences, not rental properties. I believe they are >different deductions in the tax code. I’m not positive, but >isn’t any interest a business pays deductable? If this is true, >the mortgage interest for a rental property isn’t deducted because >it’s mortgage interest, but rather because it is interest (of any type).
If the law is changed to say mortgage interest is not deductable, and a business tries to hide this as ‘other interest charges’ that business will be taking a quick trip to the IRS Auditor and the owners will be rapidly emptying their bank accounts. The way tax law works is NOT as you have surmised. The IRS says "THIS IS NOT OK" and any attempt to hide it under another heading gets you busted. >A renter pays more than an owner for the same thing. You obviously >don’t agree with me because you are the God-of-all-economists.
No, I don’t agree with you because you are a clueless twit. I’m only a BA in Econ, there are many many far better than I at Econ. You are not one of them. >The fact >is, if landords were taking a loss, they wouldn’t be doing it.
Never been in business have you? Sometimes you win, sometimes you lose, sometimes you break even. You HOPE that on AVERAGE you win. IF you are losing at the moment, you look for ways to ‘cut your losses’, which MAY only be reducing them to a smaller loss. If you choices are A) lose $300/mo to taxes. B) lose $100 mo cash flow but hope to get it back in 10 years as capital gains. C) lose $20,000 NOW as a capital loss from sale of property. THEN the most reasonable choice is B. The tax code puts a large number of folks in group A. Some of them opt for option B when real estate looks like a good investment. Then the IRS changes the rules and/or the economy heads for the toilet for a couple of years and option C pops up while the odds of captial gains on the property head toward zero… Some clueless folks take option C at that point (The Gov’t did this Big Time with the Resolution Trust Corporation on all our behalfs wasting our tax dollars…) and lose a bundle. Then the cycle repeats. If you are very good at it, you can play these cycles so that you net win. I’m winning, but not as much as you assert landlords do and not for the reasons you assert. >You obviously aren’t a very good economist if you are taking a >loss with your rental properties and aren’t doing anything about it.
First off, I inherited them. One unfortunately does not get to choose the time of their parents passing and has limited control over the form of the assets inherited. Second off, I am not taking a loss (largely due to the fact that they were inherited). My tax bracket is high enough that they are, after the DEPRECIATION deduction, still a small advantage. No, I won’t go into all the detail here, but there is a substantial tax advantage to inheriting real estate rather than cash. Ask your CPA about how ‘cost basis’ is handled in an estate sale. Lastly, I’ve looked at the economics of CONVERTING MY PRESENT HOME to a rental and they ARE BAD so I havn’t done it. You’ve made several dumb presumptions here. You’ve presumed to know my personal economics (which you don’t). You’ve presumed to know my future plans (‘not doing anything’) which you don’t. You’ve presumed that an economic analysis of a proposed business activity is the same as having entered into it (I’ve chosen NOT to do the conversion because it WOULD BE a loss). Sheesh. Taking to you is a waste of space. >:Anyone who believes that it is a ’subsidy’ >:to have some part of their income sheltered from legal government theft >:is a suitable object of pity. >It is a subsidy if you get it and someone else doesn’t because they don’t >own a house.
I pity you. >:This has all gone far afield of energy, and I, for one, am posting no >:more in response to this thread.
Guess I was wrong… this time for sure… 
>:Further followup should go to one of the tax or econ groups >:How’s that old saying go? "God help me to save the world while I still >:know it all and before I turn 20 and become as stupid as my parents." >first of all, I’m older than 20, 25 actually.
Gosh! All of 25(!). What great wisdom and vast business experience you must have. Undoubtedly you have had far more interactions with the IRS than either Johh or I have had, and must have run far more businesses than the mear 1/2 dozen or so we’ve run, and have a much much better grasp of the realities of commerce. >:A 2000 sq ft house in this area will get 600-1000 dollars a month.(rent) >:At 6.5% interest for 20 years, the payment is $745.57 (mortgage)
Gads man, how do you get a 6.5% loan on a rental property? Out here we’re only getting 7 1/2 on owner occupied! Have you allowed for the down payment ‘cost of money’ in the mortage figures? (I’ll look for the original article and see what you did.) >I imagine the rent is closer to the $1000 figure if it is a $100k home. >Sounds like the renter is paying more, huh? >:My profit before taxes is 2400 – 853 = $1547. >Sounds like the renter is getting screwed, like I’ve said all along.
Maybe, John is more heartless than I am >And E.M. Smith is trying to tell me that he is losing money.
No, I have never made that assertion. I’ve asserted that I’m not raking it in … and that competitive market pressures make the rental rate less than the cost of the mortgage resulting in a negative cash flow for any property bought at 100% leverage. i.e. that the mortgage interest deduction is shared with the renter. >He definitely needs to consult an economist.
One consults an economist for insight into the actions of the Fed, interest rate projections, and sometimes microeconomic modeling. One consults a real estate property management company for advice on real estate. I have one ‘on retainer’ should I need them. (My old college roomie. I got him started in Real Estate by showing him what my Dad was doing. Dad, BTW, was a
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:I don’t get to deduct my home office. Some home offices are deductable is you are really running a business from there, and that is all that it is used for. You probably use it to watch TV because you can’t agree with your wife on a TV program. It would probably flag an audit because most people who try an claim a home office don’t really use it as an office. :I don’t get to deduct any old business :lunch either, and only 1/2 of the ones the IRS decides I really needed :to conduct. You would eat lunch anyway so why should you be able to deduct it. I remember my dad taking us out to lunch and deducting it as a business lunch. The fact is *maybe*, at the most, half of the "business" lunches really are. :the principal was NOT deductable my mistake, I was thinking of the deductable depreciation. :If the ‘mortgage interest deduction’ is GONE, it is GONE. :You don’t get to magically just roll it back in again as a ‘business :deduction’ Yes and no. The "mortgage interest deduction" referred to is for personal residences, not rental properties. I believe they are different deductions in the tax code. I’m not positive, but isn’t any interest a business pays deductable? If this is true, the mortgage interest for a rental property isn’t deducted because it’s mortgage interest, but rather because it is interest (of any type). A renter pays more than an owner for the same thing. You obviously don’t agree with me because you are the God-of-all-economists. The fact is, if landords were taking a loss, they wouldn’t be doing it. You obviously aren’t a very good economist if you are taking a loss with your rental properties and aren’t doing anything about it. :Anyone who believes that it is a ’subsidy’ :to have some part of their income sheltered from legal government theft :is a suitable object of pity. It is a subsidy if you get it and someone else doesn’t because they don’t own a house. :This has all gone far afield of energy, and I, for one, am posting no :more in response to this thread. Further follup should go to one 
f the tax or econ groups Good, because I like to have the last word. :How’s that old saying go? "God help me to save the world while I still :know it all and before I turn 20 and become as stupid as my parents." first of all, I’m older than 20, 25 actually. Second, I remember the saying as "… as closed-minded as my parents" Maybe you should remember that since it has probably been a long time since you were 20, and so your kids don’t think your so old and such an embarrassment to show to their friends. :A 2000 sq ft house in this area will get 600-1000 dollars a month.(rent) :At 6.5% interest for 20 years, the payment is $745.57 (mortgage) I imagine the rent is closer to the $1000 figure if it is a $100k home. Sounds like the renter is paying more, huh? :My profit before taxes is 2400 – 853 = $1547. Sounds like the renter is getting screwed, like I’ve said all along. And E.M. Smith is trying to tell me that he is losing money. He definitely needs to consult an economist. Eric
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|The fact of the matter remains, the IRS gets more in a landlord/renter |relationship than from a homeowner. The landlord obviously isn’t going |to eat this, so the renter pays. In your absurdly simplified model maybe. But how about reconciling your model to the real world. I notice you wtill haven’t answered my questions about your model. |:but realize that those who DO still rent WILL pay more. Period. |Haven’t I been saying this all along? Nice of you to pull a line out of context. The statement that you have quoted was in reference to the deductability of mortgages being removed from landlords. In which case they, and therefore their tenants would pay more. Your original objection was to the claim that renters benefited from landlords being able to deduct their mortgage interest. Would you care to get back to that question? — Mob rule isn’t any prettier merely because the mob calls itself a government It ain’t charity if you are using someone else’s money. Wilson’s theory of relativity: If you go back far enough, we’re all related.
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>You have created some nice little FICTIONAL scenarios to demonstrate >the way you WISH THE WORLD WORKED, but it just isn’t that way. >If you wish to ignore the real world experience of those of us who >own properties and manage them and pay the bills and do the spread >sheets WITH OUR REAL DOLLARS, that is fine. I will enjoy watching >the naivete…
And selling one of your money-pits to him or someone like him. That’s what I love about the naive – they rescue the market for otherwise unsellable properties. >Before you two closed-minded individuals go and insult my schooling >and my economics teacher, I suggest that you *think* first. This is >so typical of all your posts. All talk and no brains.
How’s that old saying go? "God help me to save the world while I still know it all and before I turn 20 and become as stupid as my parents." >Put me in with them, then. I’m not closed-minded, but let me tell you, >every year I pay a CPA several hundred dollars to prepare my taxes, >every year I look at the spread sheets on my rentals, >every year I think I should dump them because it’s a losing deal… >I keep them largely because one of them was ‘the family home’ when >I was growing up and I’m nostalgic about it. The other was the >first rental home my DAD bought (back when you could make money >at it) and I’ve got an attachment to it, too… >I am a trained Economist. I am a manager who does budgets and >discounted cash flows, and depreciation schedules on a daily basis. >I am a property owner who runs rentals. It’s MY MONEY on the line. >The last round of tax changes made rental property less ‘attractive’.
Yup. I’m not an economist but it doesn’t take one to do the math. Single family dwellings are money-pits. Most are rentals for the same reasons yours are and those reasons have nothing to do with profits. People rent houses because they are having trouble selling them or they inherited them or whatnot. The calculation is easy, even for the highly educated student. A 2000 sq ft house in this area will get 600-1000 dollars a month. Let’s say $1000. Now take that 2000 sq ft and split it between 4 500 sq ft efficiency apartments. Each will bring in $500-600 a month. That’s $2000-2400 a month, well over twice what the single family house brings. A 2000 sq ft house around here will bring $80-100,000. Let’s say $100,000. At 6.5% interest for 20 years, the payment is $745.57. I may or may not turn a profit, depending on the local market. Probably not. The 4 unit efficiency, on the other hand, will turn a profit. Residential rental property right now sells for about $55 a sq ft in this area. That’s $110,000. At 7% (about the going rate for commercial money), the payment for 20 years is $852.85, assuming 100% financing (possible for commercial). My profit before taxes is 2400 – 853 = $1547. Not only do I make a hansom profit BEFORE taxes, I spread my risk. If my house renter fails to pay the rent, I’m out the whole kilobuck. However, if one of my efficiency renters fails to pay the rent, I still make a PROFIT. This is why I wouldn’t touch a rental house. There are several factors at work here that our esteemed student’s profs who do his thinking for him probably have not realized, being perched in the towers of ivory as they are. One is that fact that middle class people have an expectation of what they must pay for housing. That causes the range of rents to compress. Another factor is direct government subsidy. For the kind of rental property I’m interested in, the tenants are almost always government-subsidized in some manner or the other. That means more money available to me. There is no direct subsidy for those who rent a 2000 sq ft single family house. >Eric (chemist-turned-part-time-tax-hobbiest) Snyder >Go back to chemistry, it suits your talents better.
Good advice. John — Performance Engineering Magazine. Email to me published at my sole discretion Happiness is Clinton’s picture on the side of a milk carton.
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>:Now the real question which you so adroitly avoided is if the landlord is >:no longer able to deduct interest payments, in your example $600/month, >:his monthly expenses will go up, in your example by $90/month. >:What will this additional expense cause the landlord to do? >: >:If you answer, he will raise your rent by $90/month, than you get an >:A in economics. >You don’t know what the hell you are talking about.
Yes, he does. If costs go up, prices go up. Either as a direct consequence of the owners increasing rents to cover new costs, or as an indirect result of owners/properties leaving the market due to lack of incentive to stay (i.e. loosing $90/month makes it much easier to decide to sell the house…). >In essense, the landlord runs a business. He only gets taxed on business >profits, so of course he gets to deduct all of his expenses.
Where to begin, where to begin… Never owned a business, eh? First mistake: "only gets taxed on business profits". The business gets taxed FOR EXISTING. Business licence or corporation fees. It pays sales taxes on anything it CONSUMES. It pays property taxes for anything it OWNS (real estate taxes or ‘personal property taxes’ for other assets, including vehicle registrations). And if it employs anyone it also gets to pay a vast and growing variety of EMPLOYEMENT TAXES (Social Security match, SDI, soon to include medical, etc.). Oh, and it gets to pay a variety of other ‘TRANSACTION TAXES’ for things like capitol gains on any asset sold or ‘property transfer fees’, etc. Second mistake: "gets to deduct all of his expenses". Big WRONGO! I don’t get to deduct my home office. Yeah, I OUGHT to be able to, but if I do the IRS will make sure to audit me more than enough times to convince me not too. I don’t get to deduct any old business lunch either, and only 1/2 of the ones the IRS decides I really needed to conduct. There are other things, but I’ve lost track of them all. The business only gets to deducts a subset of expenses and only those that the IRS had positivly affirmed are deductable and only if they are not on a current list of ‘hot topics’ that the IRS wants to discourage this week (like home offices). Now, IFF there is some small profit left over AFTER all the other taxes and expenses (that the IRS deemed legitimate to ‘deduct’) are coveredd, THEN you get to give a chunk of THAT to the {Feds, State, City, etc.). If, by some miracle, a smidgion is left for you, well, don’t worry, that gets added to your individual income for further taxation … (depending on form of business ownership, proprietorship, Sub-S, Inc.). >So he >deducts the mortgage interest, as well as the mortgage principal,
Last time I looked, the pricipal was NOT deductable. I pay a CPA to track this stuff now, so it may have changed, but I’ve never ever heard of a pricipal payment being deductable… >because it is a business expense. Now lets assume there was no mortgage >interest deduction. He still will deduct the mortgage interest and all >other expenses because it is a business and he is only taxed on profits.
BZZZZT. WRONGO! If the ‘mortgage interest deduction’ is GONE, it is GONE. You don’t get to magically just roll it back in again as a ‘business deduction’. It either is or is not deductable. If it is gone, it is gone. THERE IS NOT BLANKET DEDUCTION FOR "Business expenses". There are only specifically approved deductions, one of which is the mortgage interest deduction. Now, if you wanted to eliminate the mortage interest deduction for individuals, yet keep it for businesses, then everyone will just form a Home, Inc. operation and rent their home from themselves (or their neighbor, if self renting is forbidden). >To say that he wouldn’t be able to deduct this without the mortgage >interest deduction is like saying that a manufacturing business couldn’t >deduct the cost of their factory from their gross income.
Well, they can’t. They have to AMORTIZE it. I buy a factory today for $1M, I don’t get to deduct $1M from my income this year. I get to deduct $1M/(years in rate schedule. 18? 27?) this year. Maybe less if they decide I didn’t jump through the right hoops. >You’re now going to say "see, renters are getting a better deal".
See, renters are getting a better deal. (Wanted to let you be right on something >That’s is BS. Look at the figures in my previous post. The fact remains >if a house is "worth" a $1000 a month,
"worth" to whom? To the renter, it is ‘worth’ $900/month. To the homeowner it is worth $1100/month. To the landlord it is worth about the same, $1100/month. >the owner will pay $1000 and deduct the interest.
The owner will pay $1100 and net of taxes be at about $900/month. >The landlord pays a $1000 mortgage and deducts all of it >as business expenses and rents it for $1000 (thereby making no profits).
The landlord pays $1100, has about $200 of tax advantage so he can rent it for $900, and takes the ‘depreciation’ as his tax win. >The renter pays $1000, to cover the landlords cost’s, but gets to deduct
Make that $900… and gets the $200 income tax advantage passed on to him. No, he does not get the ‘depreciation’ advantage. >nothing. The owner will always pay less in taxes than the landlord/renter, >because the landlord is a middle-man. The more middle-men, the more >taxes paid.
The owner does not get the tax deferral of a depreciation deduction nor is is maintenace cost deductable. The landlord pays less tax. This advantage is split with the renter as a buy down of rental rates to below purchase mortgage rates. >It is a very simple principle.
But a wrong one. The real world is much more complex. >The IRS taxes a transaction.
The IRS taxes some kinds of money flows, called income, that may or may not involve a transaction. Look at the ‘imputed income’ from holding Zero Coupon Bonds for an example. >A landowner pays taxes when a mining company buys their land,
May, or may not. Depends on the purchase price relative to sales price (capitol gain/loss) , depreciation taken to date, tax deferred rollover (tax free exchange for like properties), tax bracket of the seller, carry forward of unused capitol losses, etc. etc. etc. >who then pays taxes when a steel manufacturer buys their ore,
Similar list to above, but concentrating on P&L items rather than captal gain/loss items. Are they making a profit on which the IRS levies a tax? Or are they sheltering the income with a tax loss somewhere? (Maybe even in a real estate deal that exchanges lower rents to tenants for ‘tax losses’ to offset their ordinary income…) >who then pays taxes when an auto manufacturer buys their steel,
Same list. >who then pays taxes when a consumer buys their car.
Same list. >The consumer already paid taxes on their income, and their >company paid taxes for …
Yes, we all have to deal with the IRS. SO? Not all transactions generate a tax and not all taxes are from transactions. >A home owner buys a house; 1 transaction. A >landlord buys a house and then rents it out; 2 transactions.
This gross simplification of reality is about as valuable as saying that "You are alive. Pigs are alive. Therefor, you are a pig." >If you can’t see this and do the simple math, you need to take a basic >math course as well as getting a trade-in on your brain.
I suggest that a brief trip to the local CPA would be a good thing for you. Having you taxes done might be a good time to strike up a relationship with one. It may cost you $100/hour, but it is worth it for a good one. If you talk to him in, oh, July, he might have a discount rate. >The mortgage interest deduction is the biggest subsidy >in this country. I’m sick of all the middle-class bellyaching about >taxes and the government because they get the biggest "welfare" of all.
I am very sorry for you. Anyone who believes that it is a ’subsidy’ to have some part of their income sheltered from legal government theft is a suitable object of pity. >There are a lot of programs that primarily benefit the middle class, but >I don’t want to get into them here because this is an energy newsgroup.
This has all gone far afield of energy, and I, for one, am posting no more in response to this thread. Further follup should go to one of the tax or econ groups. >Email me for more info if you don’t believe me.
No, thank you. I talk with my CPA or my MBA instructors when I want tax or business advice. They are both more accurate and more reliable. Yes, I don’t believe you. But hey, Economics is only my degreed field, and I’m only employed managing a multi million dollar budget and I only own and manage three properties of my own … what do I know … Mikey "who probably pays more in taxes than the other guy makes" Smith — ‘Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.’ - Goethe "A goal is a dream taken seriously" — Henry David Thoreau I am not responsible nor is anyone else. Everything is disclaimed.
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>::We will start with two hypothetical taxpayers in two different scenarios. >::Taxpayer 2 has a gross income of $2000, pays a mortgage of $1000 for >::investment property and rents the house for $1100. >:And this is where your model falls apart. You just can not go out >:and buy a home with no cash down that rents for more than the
Notice this little point? >:mortgage payment. IFF you put down a BIG downpayment, then you >:MIGHT be able to get a positive cash flow, but then you are forgoing >:the income that down payment would have earned in the bank. >:If it were the case that positive cash flow was that easy, you can >:bet that everyone and their cousin would just go out and sign up >:for all the properties they could find every waking minute. Hey, >:it would all be ‘free money’. Just sign the papers and the positive >:cash flow comes rolling in. We can all be millionairs tomorrow!!!! >:But, sadly, that is not the case… >Wrong; like I said before, not everywhere. Where have you been lately?
California. >Although the market has been depressed lately, a lot of people made a lot >of money in real estate. I lived in California for 23 years and a lot >of people made a lot of money doing just that.
As did my Father. That is why I have 2 rentals today, and have looked at the math of converting a third. Yesterday doesn’t matter to todays economics. IFF inflation ever comes back AND the tax laws of the last 23 years THEN it MIGHT make bundles of money again. Not now. >You *might* not have a >positive cash flow at first, but when rent goes up over time, you’re still >paying a low mortgage. This is especially enticing in CA, because of the >"frozen" property taxes with Prop. 13.
This is a model based on the past. California presently is in a deflationary cycle. Home prices are going DOWN and have been for about 2-3 years. Now, you can ‘lock in’ a nice high morgage and watch your rents drop over time… as your equity also evaporates … >The reason why everyone doesn’t do this is that you need cash to start with,
Remember that little caviate above? If you could get a positive cash flow with zero down, folks would do it. At non-zero down, folks have to allow for the lost earnings of that equity… >:gap between mortage rates and rental rates, but there is still SOME >:disparity (rents being LOWER) due to the deductability of the >:mortgage interest. >I disagree. You are generalizing again. There are plenty of landlords >out there with a positive cash flow. I would go out and buy an >apartment building today for a positive cash flow except for two reasons: >I don’t currently have the cash necessary to buy a building and I have no
>desire being a landlord and dealing with the hassels.
Yes, you can always get a positive cash flow if you are willing to put enough money down. The limiting case is 100% down. That is why I stipulated the 0% down measuring stick… It may well be different in other parts of the world, and I’d love to go pick up a few dozen properties with positive cash flows and only closing costs to pay, but I’ve never found them (unless you are big enough to get on on Resolution Trust Corp. deals where they are raping the taxpayer to make millionairs into billionairs). >The fact of the matter remains, the IRS gets more in a landlord/renter >relationship than from a homeowner.
Pardon me? Homeowner: Deducts mortgage interest. Rental owner: Deducts mortgage interest, maintenance, travel costs, advertizing costs, some phone and office costs, property taxes? (I think), depreciation, and a few other details. Rental income is less than mortgage and/or depreciation so is not net income so no income tax on it. Homeowner income is fully taxed. Renter income is fully taxed. Case #1: Homeowner. Income fully taxed, one deduction for interest. Case #2: Rental: Renter income fully taxed, rent payment sheltered from taxation, additional deductions applied for a net tax loss by landlord reducing his tax burden. >The landlord obviously isn’t going >to eat this, so the renter pays.
The landlord taxes a ‘tax loss’ and competitive market presures make him share this loss with the tenant via lower than morgage costs rents. At least in this area, I can quote you the exact spread. $900 rent and $1100 mortgage FOR MY HOME. >:but realize that those who DO still rent WILL pay more. Period. >Haven’t I been saying this all along?
No. You have been saying that as thing stands the renter pays more. What you cut out was my statment that IF TAX DEDUCTIONS ARE REMOVED THEN the renter will more than he does today. — ‘Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.’ - Goethe "A goal is a dream taken seriously" — Henry David Thoreau I am not responsible nor is anyone else. Everything is disclaimed.
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::We will start with two hypothetical taxpayers in two different scenarios. ::Taxpayer 2 has a gross income of $2000, pays a mortgage of $1000 for ::investment property and rents the house for $1100. :And this is where your model falls apart. You just can not go out :and buy a home with no cash down that rents for more than the :mortgage payment. IFF you put down a BIG downpayment, then you :MIGHT be able to get a positive cash flow, but then you are forgoing :the income that down payment would have earned in the bank. This is not true; maybe where you own property, but not everywhere. The apartment I rent is in a house converted to two apartments. The rent paid by both apartments combined is $1000/month. I know that similar houses in the same neiborhood are going for $100-$120 k. With current interest rates, this will give you a positive cash flow. Not to mention the fact that the landlord has owned the house for 10 years, so the mortgage he is paying is undoubtedly less than the $100-$120 k figure. If the house were purchased at today’s prices, he will still have a positve cash flow, unless some extensive maintenence were needed. We have only be talking about houses in which the landlord is hoping to make profit from the appreciation of the house. Most renters live in apartment buildings where there is definitely a positive cash flow. :If it were the case that positive cash flow was that easy, you can :bet that everyone and their cousin would just go out and sign up :for all the properties they could find every waking minute. Hey, :it would all be ‘free money’. Just sign the papers and the positive :cash flow comes rolling in. We can all be millionairs tomorrow!!!! :But, sadly, that is not the case… Wrong; like I said before, not everywhere. Where have you been lately? Although the market has been depressed lately, a lot of people made a lot of money in real estate. I lived in California for 23 years and a lot of people made a lot of money doing just that. You *might* not have a positive cash flow at first, but when rent goes up over time, you’re still paying a low mortgage. This is especially enticing in CA, because of the "frozen" property taxes with Prop. 13. The reason why everyone doesn’t do this is that you need cash to start with, and that there are risks and the hassels of being a landlord. Most people would rather put their money in a mutual fund and forget about managing it. Leave it to the professionals. :gap between mortage rates and rental rates, but there is still SOME :disparity (rents being LOWER) due to the deductability of the :mortgage interest. I disagree. You are generalizing again. There are plenty of landlords out there with a positive cash flow. I would go out and buy an apartment building today for a positive cash flow except for two reasons: I don’t currently have the cash necessary to buy a building and I have no desire being a landlord and dealing with the hassels. The fact of the matter remains, the IRS gets more in a landlord/renter relationship than from a homeowner. The landlord obviously isn’t going to eat this, so the renter pays. :but realize that those who DO still rent WILL pay more. Period. Haven’t I been saying this all along? Eric P.S. Another outrageous thing is the idea of "home equity" loans. Why the hell should someone who buys a car financed with a home equity loan be able to deduct the interest while I can’t deduct anything because my car’s financed by a traditional bank loan?
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|>Tell me Eric, are you honestly trying to claim that if the landlord were |>not able to deduct his interest payments, than he would not raise your |>rent. |>And you want anyone else to take you seriously. Jigs, who wrote this. I know I didn’t even though the attributes say I did. I’m pretty sure you didn’t because it refers to both of us. |>I don’t mean to burst your bubble, but you are both right in a way. If the |>landlord were not able to deduct his interest payments, he would pay some of |>the bill, but it does not get passed entirely to the renter. The only rational |>I can give you without asking you to refresh your micro econnomics is that |>a raise in rent reduces the demand for those residences (whether apartments or |>others). If this reduction in demand means that one of his places would go |>unrented, he would rather swallow some of that extra costs, for he would be |>making more net monies. I could give you a more technical explanation, but |>I am not sure you want one. 
Actually no. The demand for housing is fairly constant. We aren’t going to rid of people after all. What would happen is that the demand for large apartments would go down, and also some of the ammenities. Cheaper appliances, thinner rugs, less outside landscaping, etc. If the mortgage deduction were eliminated overnight, you are right that the landlord in the short term would have to eat part of the difference. But over time, the rental stock would adjust to the new realities. |>Jigar Shah — Mob rule isn’t any prettier merely because the mob calls itself a government It ain’t charity if you are using someone else’s money. Wilson’s theory of relativity: If you go back far enough, we’re all related.
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I think the John DeArmond wrote the paragraph below. I am not sure. I am sorry for mis attributing you. – Hide quoted text — Show quoted text ->|>Tell me Eric, are you honestly trying to claim that if the landlord were >|>not able to deduct his interest payments, than he would not raise your >|>rent. >|>And you want anyone else to take you seriously. >Jigs, who wrote this. I know I didn’t even though the attributes say I did. >I’m pretty sure you didn’t because it refers to both of us. >|>I don’t mean to burst your bubble, but you are both right in a way. If the >|>landlord were not able to deduct his interest payments, he would pay some of >|>the bill, but it does not get passed entirely to the renter. The only rational >|>I can give you without asking you to refresh your micro econnomics is that >|>a raise in rent reduces the demand for those residences (whether apartments or >|>others). If this reduction in demand means that one of his places would go >|>unrented, he would rather swallow some of that extra costs, for he would be >|>making more net monies. I could give you a more technical explanation, but >|>I am not sure you want one. >Actually no. The demand for housing is fairly constant. We aren’t going to >rid of people after all. What would happen is that the demand for large >apartments would go down, and also some of the ammenities. Cheaper appliances, >thinner rugs, less outside landscaping, etc. >If the mortgage deduction were eliminated overnight, you are right that the >landlord in the short term would have to eat part of the difference. >But over time, the rental stock would adjust to the new realities. >|>Jigar Shah >– >Mob rule isn’t any prettier merely because the mob calls itself a government >It ain’t charity if you are using someone else’s money. >Wilson’s theory of relativity: If you go back far enough, we’re all related.
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>John De Armond writes: >:I do have a mortage and I do take the tax deduction. I’d lots rather >:not have the taxes to deduct against. … >: as a renter, you do indeed enjoy the same "subsidy" that I do. Your >:landlord would gladly charge you added rent were his deduction go away. >Mark Wilson writes: >:If your landlord weren’t able to deduct the interest on the mortgage, you >:would be paying more for your apartment >You guys are unbelievable. Talk about having the BS meter go offscale.
Um, I too said that as a landlord I’d increase rents if no deduction existed. I also pointed out that Real World Prices showed that rental rates were lower for the same home than purchase prices. The simple in-escapable conclusion from these real world facts (not theories) is simple. The renter is not being ’screwed’ by lack of a deduction. >We will start with two hypothetical taxpayers in two different scenarios. >Taxpayer 2 has a gross income of $2000, pays a mortgage of $1000 for
^^^^^ >investment property and rents the house for $1100.
^^^^^^ And this is where your model falls apart. You just can not go out and buy a home with no cash down that rents for more than the mortgage payment. IFF you put down a BIG downpayment, then you MIGHT be able to get a positive cash flow, but then you are forgoing the income that down payment would have earned in the bank. If it were the case that positive cash flow was that easy, you can bet that everyone and their cousin would just go out and sign up for all the properties they could find every waking minute. Hey, it would all be ‘free money’. Just sign the papers and the positive cash flow comes rolling in. We can all be millionairs tomorrow!!!! But, sadly, that is not the case… What happens is that the push to get that tax deduction is so high that an over purchase of rental stock is made with a concomitant oversupply to the market. The rental rates drop below the mortgage rate, and the cash flow ‘goes negative’. OK, but lets say I’m getting $400 tax defrayed and only have a $300 negative… NET OF TAXES, I’m still $100/month ahead, so I do it. Then the next guy is willing to do it for only $50/month… Then $10/month … etc. The result of all this is that rental properties end up being owned by the people who most need the tax deductions, AND the rent ends up being reduced do to competitive pressures, to where most of that advantage goes to the renter. The landlord just hopes that he can sell the home for more money at some future time due to inflation. ie. the home ends up as an inflation hedge. I know, I own a couple and have serious doubts about doing a third because the return on investing EVEN INCLUDING THE TAX ADVANTAGE, just isn’t there. In an infationary market I was willing to carry them at a wash, since the property value was going up. In a deflationary market, there is little to interest me in converting my present property into a rental and losing a little every month… Yes, losing a little. I would have to take about a $150 to $200 a month negative cash flow NOT INCLUDING insurance, maintenance and property taxes, to convert it to a rental. AND this is with about a 20% equity in place! You have created some nice little FICTIONAL scenarios to demonstrate the way you WISH THE WORLD WORKED, but it just isn’t that way. If you wish to ignore the real world experience of those of us who own properties and manage them and pay the bills and do the spread sheets WITH OUR REAL DOLLARS, that is fine. I will enjoy watching the naivete… >Before you two closed-minded individuals go and insult my schooling >and my economics teacher, I suggest that you *think* first. This is >so typical of all your posts. All talk and no brains.
Put me in with them, then. I’m not closed-minded, but let me tell you, every year I pay a CPA several hundred dollars to prepare my taxes, every year I look at the spread sheets on my rentals, every year I think I should dump them because it’s a losing deal… I keep them largely because one of them was ‘the family home’ when I was growing up and I’m nostalgic about it. The other was the first rental home my DAD bought (back when you could make money at it) and I’ve got an attachment to it, too… I am a trained Economist. I am a manager who does budgets and discounted cash flows, and depreciation schedules on a daily basis. I am a property owner who runs rentals. It’s MY MONEY on the line. The last round of tax changes made rental property less ‘attractive’. Due to them, I’m most likely NOT going to turn my present home into a rental as I’d planned years ago. This reduces the rental stock, increasing rental prices. It will be sold instead. This increases the purchased houses, decreasing mortgage prices. This narrowed the gap between mortage rates and rental rates, but there is still SOME disparity (rents being LOWER) due to the deductability of the mortgage interest. If mortgage interest stopped being deductable, there is one of my rental in particular that I’d likely sell. This would continue to push rents up and mortgages down. The ‘end game’ of this is rents and mortgages being roughly equal in price at the point where there is no mortgage interest deduction. (depreciation and [repair costs + property tax] roughly balance to a net zero impact). This is about how things were post WWII I think. ( I could be off a decade or two… somewhere in there, there was a housing boom as everyone and their brother bought homes because it was as cheap as renting…) You may want more people to own homes, rather than rent them, but realize that those who DO still rent WILL pay more. Period. The net effect of a mortgage interest deduction is that the government subsidizes a lower rental price due to stimulation of excess competition in the rental market and induces more people to rent and fewer to own their own homes. >Eric (chemist-turned-part-time-tax-hobbiest) Snyder
Go back to chemistry, it suits your talents better. — ‘Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.’ - Goethe "A goal is a dream taken seriously" — Henry David Thoreau I am not responsible nor is anyone else. Everything is disclaimed.
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Summary: A modestly long detailed discussion of why, in most cases, general cost increases go right to prices, while from time to time some kinds of cost increases can’t. General support for the position that The Tennant Pays. One amusing horror story. Couple of good ‘digs’ at the gov’t near the end. >>Tell me Eric, are you honestly trying to claim that if the landlord were >>not able to deduct his interest payments, than he would not raise your rent. >>And you want anyone else to take you seriously. >I don’t mean to burst your bubble, but you are both right in a way. If the >landlord were not able to deduct his interest payments, he would pay some of >the bill, but it does not get passed entirely to the renter. The only rational
This only holds in a market with price elasticity of demand. Everyone tends to need a home… a rather in-elastic market… Yes, you are right that there MAY be some splitting of the increased costs between higher prices (rents) and lower profits (lost deduction without higher prices) but you have no data for HOW MUCH percent to each. And this will be swamped by the Price Elasticity of SUPPLY of housing… >I can give you without asking you to refresh your micro econnomics is that >a raise in rent reduces the demand for those residences (whether apartments or >others).
And a rise in costs reduces the supply of those residences. Since everyone needs to live SOMEWHERE, demand is relatively IN-elastic. Since I can choose to invest in many alternatives to rental housing, supply is very LONG TERM Elastic. Supply will drop more than demand will drop. Prices will rise in the long term. >If this reduction in demand means that one of his places would go >unrented, he would rather swallow some of that extra costs, for he would be >making more net monies. I could give you a more technical explanation, but >I am not sure you want one.
This is what happens on day one. On day two, he decides not to turn that second home into a rental. On day three, he decides not to put that extra $10k into a Real Estate REIT for rentals, but into {stocks, bonds, an addition to his own home, a vaction in Tahiti, a Swiss Account, a CD, etc…} On day four, some housing stock has left the market (fires, floods, age, ‘reconstruction’ aka wrecking ball, etc.) and the rental prices go up as the supply is too short… Equilibrium pricing will be re-established with prices higher by roughly the magnitude of the increase in costs, but with slightly fewer rental units. >Please, tell me you’re a freshman with a mind still full of mush. I’d >really hate to think you represent what the university is producing >today.
He looks to me like exactly what comes out of the first 2 years of and Econ education… (I know, I got one 8-{ ) Lots of theory, little critical thinking to sort out what theory to apply… Less experience… >Your juvenile, amateurish, one-dimentional analysis of rental >prices is appalling. I’m no economist (thank God) but I AM a small
I am … But I got a Real Job in computers. Can I thank God too? ;-) >businessman and a landlord so I do know a thing or two about setting >rental prices.
Gee … I have a home business and some rentals as well… >What you say is somewhat true when a single property incurrs additional >cost. It is patently false when the added cost affects the whole >market, costs such as fuel or taxes. (E. Mike, put a fancy economist >name on this
OK. "Inflation" … (I’ve spent the last 20 years getting the bullshit generator they taught me in Econ classes shut down so I can talk plainly… I’m getting rusty at the ‘fancy economist names’ these days… Thank God!) Well, maybe "Inflationary Cost Escallation in a Non-competitive Factor of Production". … Or, maybe … No, I won’t inflict that on you >When the cost to everyone in the market goes up, >there is NO competitive pressure on prices and the ALL go up.
In an in-elastic market. Which housing tends to be. There is always some trivial elasticity in even very price inelastic markets. But it is small enough to ignore. Yeah, some folks may be put on the street or move back with mom and dad, but not enough to matter. Yeah, prices can rise so high compared to income that noone can pay them (like The Great Depression), but that is not the part of the curve we are on. But back to a cost increase or, the flip side, a cost decrease… The flip side of this is rather interesting as well, and proves John’s point rather nicely. Look at the cost of a mortgage on a home, where you can deduct the interest, then look at the cost of renting that same home (where someone ELSE gets the deduction). For example, my home would, bought new, have about a $1100/mo. mortgage. Rented, it would be between $900-$1000/mo. HOW can it RENT for less than it COSTS? (Called a ‘negative cash flow’…) And that isn’t even counting repair costs, taxes, etc. that the landlord gets to eat… The answer is that the landlord has a tax ‘buy down’ from the Govt in the form of a tax deduction. This reduced cost entices more people to buy homes for renting and DISTORTS THE MARKET by INCREASING THE SUPPLY of rental homes thus LOWERING PRICES to the renter(!). Yes, the evil landlord takes on all the headaches of a rental property and STILL ends up passing some/all of the ‘tax deduction’ on to the renter in the form of lower rents due to competitive pressures in a non-elastic market with excess supply… It is very rare these days to find positive cash flow properties unless they have some really gimicky financing that hides this gigantic payment in a year or two… Take away the tax deductability, the supply of rentals will drop as more people buy homes, the price to rent goes up. >At least those landlords who desire to maintain their profit margins >do. When the price of energy rises, so do my rents (I provide utilities – >makes it easier to evict deadbeats). When a local government passes >"tenant protection" (NOT!) laws, I figure out what it will likely >cost me and raise the rent accordingly. When the government reduces some >tax dedution or anothe, the rent goes up. YOU pay, not me. That >business can somewhow be forced to pay is the BIG LIE of the last half >of the 20th century and is responsible for our continuing decline in >real income. I, as a business, DON’T pay. Period. You do.
Well, this is 90% true… For some products the market is highly competitive and global. In that case the company will not be able to make the customer pay. It may still not be profits that suffer. They can squeeze their suppliers, they can squeeze the employees. There are lots of folks they can try to stick with the bill. But some times it IS the business that pays. Take, for example, Silver Mining. Most silver comes as a byproduct of other metals mining (such as copper). If there is an increase in silver mining costs, unrelated to copper costs, the supply is NOT going to change much or at all. Also, the world supply will dominate the price. So, putting a ’severance tax’ on silver mining in the US WOULD NOT increase silver prices, yet WOULD increase costs. The customer will not pay that tax. Who will? Who knows. Could be shareholders from reduced earnings. Could be the company will buy less stuff or squeeze their vendors for better deals. Could be the CEO will get less pay. Could be the miners will get less pay. Could be some marginal mines in the US close and the work goes to China or Chili or Bolivia or … Rental housing is not this way. >Even a cursory examination of rental prices around the country >should show you this. There is nothing that intrinsicly makes >rental property in small town PA worth twice what it is in >small town Tn but that’s exactly the situation. Example. I like
Location, location, and location. … (The 3 things that determine property value … >Why did the market support such prices there? Everything cost more >there but that was only part of the equation. The big factor was >the so-called "tenant protection" laws that made it almost impossible >to evict a deadbeat. They also imposed rather ridiculous building >codes on rental property.
Not only will the increased real costs of these things be something you pass on, but since there is an increased risk to you, the landlord, you will tack on a ‘Risk Premium’ as well. Risky investments require higher rewards to attract investers. >When I learned that it might take me >6 months to evict a deadbeat and even then, perhaps only after >using creative techniques like causing heating failures in the winter,
Um, in California at least, a caused ‘heating failure’ gets you a quick trip to court and/or jail … Because of the difficulties of getting rid of a destructive and/or deadbeat when on Public Assistance in California, I do not rent to anyone unless they have significant dollars. (If someone on Welfare is in your home and can’t pay the rent, that’s your problem in California. No, you can’t evict them as you could with anyone else. YOU have to find THEM a new place to live! Consequently, NO ONE wants to rent to them in the first place… Consequently, if one ever gets in on you, you are in a world of hurt. I got one to leave by PAYING HIM (somewhat under the table, letting him steal the appliances…) to get out. NEVER AGAIN. IFF I ever had to rent to them, I’d make sure there was at least enough rent premium to cover a 6 month zero income interval. Figure about 50% rent premium. And since noone wants to rent to them, the price increase IS doable, since there is effectively a reduced supply. I have another tennant who is never a problem, always pays … read more »
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>>Tell me Eric, are you honestly trying to claim that if the landlord were >not able to deduct his interest payments, than he would not raise your >rent. >And you want anyone else to take you seriously. >I don’t mean to burst your bubble, but you are both right in a way. If the >landlord were not able to deduct his interest payments, he would pay some of >the bill, but it does not get passed entirely to the renter. The only rational >I can give you without asking you to refresh your micro econnomics is that >a raise in rent reduces the demand for those residences (whether apartments or >others). If this reduction in demand means that one of his places would go >unrented, he would rather swallow some of that extra costs, for he would be >making more net monies. I could give you a more technical explanation, but >I am not sure you want one.
Please, tell me you’re a freshman with a mind still full of mush. I’d really hate to think you represent what the university is producing today. Your juvenile, amateurish, one-dimentional analysis of rental prices is appalling. I’m no economist (thank God) but I AM a small businessman and a landlord so I do know a thing or two about setting rental prices. What you say is somewhat true when a single property incurrs additional cost. It is patently false when the added cost affects the whole market, costs such as fuel or taxes. (E. Mike, put a fancy economist name on this When the cost to everyone in the market goes up, there is NO competitive pressure on prices and the ALL go up. At least those landlords who desire to maintain their profit margins do. When the price of energy rises, so do my rents (I provide utilities – makes it easier to evict deadbeats). When a local government passes "tenant protection" (NOT!) laws, I figure out what it will likely cost me and raise the rent accordingly. When the government reduces some tax dedution or anothe, the rent goes up. YOU pay, not me. That business can somewhow be forced to pay is the BIG LIE of the last half of the 20th century and is responsible for our continuing decline in real income. I, as a business, DON’T pay. Period. You do. Even a cursory examination of rental prices around the country should show you this. There is nothing that intrinsicly makes rental property in small town PA worth twice what it is in small town Tn but that’s exactly the situation. Example. I like lower middle income rental property because it is the most profitable. At the time I bought an apartment building in Middletown PA (pop ~20,000), I was lucky to be able to get $200 for 500 sq ft in Tennessee. In PA, I started out at $500/month for 500 sq ft and about had my phone blown off the wall. That was so much cheaper than anyone else in the area that I could have rented 3 times as many units as I had. I quickly pushed the price up to $650/mo and still the people came. Why did the market support such prices there? Everything cost more there but that was only part of the equation. The big factor was the so-called "tenant protection" laws that made it almost impossible to evict a deadbeat. They also imposed rather ridiculous building codes on rental property. When I learned that it might take me 6 months to evict a deadbeat and even then, perhaps only after using creative techniques like causing heating failures in the winter, I simply raised my prices to compensate for the potential lost revenue. I also instituted a MUCH more detailed background check on potential tenants. So while someone could just walk in and ask for an apartment in Tennessee, an applicant went through a detailed background and credit check in PA. The PA tenant, of course, paid for all that. If the govenrment increases my costs through whatever means, you the tenant WILL pay for it. All of it. Maybe even more, if I think I can use the government action as an excuse to turn a little more profit. You will pay both in direct costs and in lost opportunity. THIS is a lesson your Keynesian/communist government-can-do-everything- better college profs likely will NOT teach you but it surely is one that you will learn in real life. Or if you don’t learn it, you will always wonder why the evil corporations are always out to get all your money. Sad. Of course, you could continue to "believe" your economic fiction in the same fashion you believe your EV fiction. John — Performance Engineering Magazine. Email to me published at my sole discretion "Dr. Kevorkian, please report to the Oval Office."
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:Eric. All your example proves is that the can talke advantage of available tax :deductions to reduce his tax bill. No shit sherlock. That was exactly the :point I was arguing. : :Now the real question which you so adroitly avoided is if the landlord is :no longer able to deduct interest payments, in your example $600/month, :his monthly expenses will go up, in your example by $90/month. :What will this additional expense cause the landlord to do? : :If you answer, he will raise your rent by $90/month, than you get an :A in economics. You don’t know what the hell you are talking about. First of all, let’s clarify the scenario. I’m talking about a person renting a house or apartment from a landlord who doesn’t live there. i.e. it is not a room in the landlord’s house or an attached apartment. In essense, the landlord runs a business. He only gets taxed on business profits, so of course he gets to deduct all of his expenses. So he deducts the mortgage interest, as well as the mortgage principal, because it is a business expense. Now lets assume there was no mortgage interest deduction. He still will deduct the mortgage interest and all other expenses because it is a business and he is only taxed on profits. To say that he wouldn’t be able to deduct this without the mortgage interest deduction is like saying that a manufacturing business couldn’t deduct the cost of their factory from their gross income. You’re now going to say "see, renters are getting a better deal". That’s is BS. Look at the figures in my previous post. The fact remains if a house is "worth" a $1000 a month, the owner will pay $1000 and deduct the interest. The landlord pays a $1000 mortgage and deducts all of it as business expenses and rents it for $1000 (thereby making no profits). The renter pays $1000, to cover the landlords cost’s, but gets to deduct nothing. The owner will always pay less in taxes than the landlord/renter, because the landlord is a middle-man. The more middle-men, the more taxes paid. It is a very simple principle. The IRS taxes a transaction. A landowner pays taxes when a mining company buys their land, who then pays taxes when a steel manufacturer buys their ore, who then pays taxes when an auto manufacturer buys their steel, who then pays taxes when a consumer buys their car. The consumer already paid taxes on their income, and their company paid taxes for … A home owner buys a house; 1 transaction. A landlord buys a house and then rents it out; 2 transactions. If you can’t see this and do the simple math, you need to take a basic math course as well as getting a trade-in on your brain. The mortgage interest deduction is the biggest subsidy in this country. I’m sick of all the middle-class bellyaching about taxes and the government because they get the biggest "welfare" of all. There are a lot of programs that primarily benefit the middle class, but I don’t want to get into them here because this is an energy newsgroup. Email me for more info if you don’t believe me. Eric Snyder
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Eric. All your example proves is that the can talke advantage of available tax deductions to reduce his tax bill. No shit sherlock. That was exactly the point I was arguing. Now the real question which you so adroitly avoided is if the landlord is no longer able to deduct interest payments, in your example $600/month, his monthly expenses will go up, in your example by $90/month. What will this additional expense cause the landlord to do? If you answer, he will raise your rent by $90/month, than you get an A in economics. Actually an argument can be made that homeowners are subsidizing renters since landlords have access to deductions that homeowners can’t use. Such as deductiong insurance, depreciation and the cost of normal household repairs. — Mob rule isn’t any prettier merely because the mob calls itself a government It ain’t charity if you are using someone else’s money. Wilson’s theory of relativity: If you go back far enough, we’re all related.
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