top of page

Make Houses Our Castles By Rethinking How We Tax Homes

ree

In the past, home ownership has been an important part of the American dream. Buying a home was the most important investment decision that citizens made. That investment could provide for one’s retirement; and equity in the home could be used to borrow for education, health care, and emergency expenditures.


Unfortunately, for many citizens, and especially for younger generations, the dream of home ownership is disappearing. Inflationary increases in home prices are pricing many citizens out of the housing market. Inflationary increases in property taxes are taxing some citizens out of their homes.


Inflationary increases in property taxes have led to a property tax revolt. In some states citizens and elected officials are calling for abolishing property taxes. But we can reform property taxes while retaining them as an important part of our tax system and federalist form of government.


The solution is to treat investment in a home the same way that we treat investment in retirement accounts. The assessed value of the home could be set at market value at the time the home is purchased and remain constant as long as the owner remains in the home. Taxes on the unrealized capital gains in the home could be deferred until the home is sold or inherited. If inherited, the assessed value of the home would be stepped up to market value for the heirs. Heirs could then take advantage of deferred taxes on capital gains in the home as well.


This reform would eliminate a bias in tax law that allows for taxation of unrealized capital gains in a home. Eliminating the taxation of unrealized capital gains in a home would make investment in a home as attractive as investing in assets in a retirement account. In effect the reform proposed in this study would open home ownership to a wider range of citizens, including younger generations. The reform would be especially important for citizens who invest in a home for retirement, putting investing in a home on equal footing with investing in a retirement account.


Property taxes have resulted in intergenerational conflicts over taxation. State and local governments have created incentives for home ownership for certain targeted groups using so-called circuit brakers, e.g. homestead exemptions, property tax rebates etc. Such targeted tax breaks are often linked to age, income, veteran status etc. The property tax reform proposed in this study would benefit all homeowners not just targeted groups. The best way to incentivize citizens to purchase a home is to provide property tax relief that benefits all homeowners.


Property taxes are the basis for a strong federalist system. They provide local governments with a source of revenue independently from state and national governments. Property taxes provide for transparency and accountability in how tax dollars are spent at the local level, which is often lacking at the state and federal level. Over the years local governments have become more dependent on state and federal revenues to fund their services. The expanded role for state and federal government in funding local government services is weakening our federalist system. The property tax reform proposed in this study would strengthen the tax system and help to restore the role of local governments in a strong federalist system.


Is there anything more demeaning than thousands of homeowners pleading with their assessor’s office for relief from their property taxes. Inflationary increases in property taxes, and especially taxes on unrealized capital gains in a home, mean that home ownership depends on how the government chooses to tax us. The proposed reform would allow citizens rather than politicians to decide how much property taxes they are willing to pay. Our home could again become our castle.


Author


Barry W. Poulson

Barry W. Poulson is professor emeritus at the University of Colorado, Boulder, Colorado, and on the Board of the Prosperity for US Foundation. He wrote this for InsideSources.com.


 
 
bottom of page