We need a third party to validate both of your claims, because I don't know where to start to understand who is right. This is an example of someone (me) who wants to understand the issue, but would need to google for days to understand both arguments.
The rebuttal by mminer237 is much closer to right [0].
Also it isn't even as good as mminer237 mentions, as many states also have a much lower exemption, and there is work in congress to get rid of the step-up in basis (a bad thing, imo) and to reduce the $12MM lifetime gift & estate exemption (a very good thing).
So yes, there are some advantages, but OP is vastly exaggerating as if it is some freebie to landlords when it is not. There were some freebies introduced in the bills in the Trump term for the type of LLCs that Trump runs, but IDK if they were fixed in legislation in this term.
If you want a general complaint, perhaps the angle is that capital is taxed much less than labor, under some notion that lower taxation is necessary to get people with capitol to actually deploy it in investments. I think that is provably false, and certainly does not require the level of tax code favoritism it currently enjoys.
[0] source: tax & estate attny at biglaw firm in the household, although this is just from info absorbed by osmosis over years and is NOT a detailed legal analysis.
It may not be a freebie for landlords, but it is much more "cost neutral" or "tax neutral" to own an investment property than to own a primary residence. Consider:
Investment property:
* Deduct maintenance costs
* Deduct insurance costs
* Deduct property taxes
* Deduct mortgage closing costs
* Deduct mortgage interest
* Deduct HOA dues
* Deduct property management fees
* Take advantage of depreciation deductions
* Avoid paying cap gains taxes on sale using 1031 exchanges
Primary residence:
* Deduct property taxes (only on federal taxes, and only up to $10k, assuming you don't have other SALT to deduct)
* Deduct mortgage interest (only up to a loan value of $750k)
* Avoid paying up to $250k in cap gains taxes on sale
Doesn't that seem incredibly lopsided to you? The current tax regime makes it very attractive to own an investment property, but a basic need -- housing! -- doesn't give you much in the way of tax breaks. And the breaks that are there, are capped.
Of course there are more deductions when an object is a BUSINESS instead of a piece of PERSONAL PROPERTY.
No, it does not seem the slightest bit lopsided.
There is zero difference between the deductability of expenses you mentioned and expenses for any other business.
Businesses are generally taxed on their PROFITS, which are [INCOME] MINUS [COSTS].
The regular homeowner is not running a business.
The same thing is true of a truck or racecar. If you own it as personal property, you don't get to deduct much of anything. If you own it and run it as a business, you can deduct your expenses before counting profits and paying taxes.
The same object can be either a personal property or a business, and it is the ACTIVITY that matters, not the object.
Your argument is either attitude & ignorance gone wild, or demagoguery attempting to confuse the issue with sleight of hand.
If you think that home ownership should be more subsidized than just the mortgage interest deduction, just say so and advocate for those subsidies. It'd be much more cogent, but you evidently don't want that discussion, or expect it to be a loser, which it likely is.
> Businesses are generally taxed on their PROFITS, which are [INCOME] MINUS [COSTS].
Sure. But why does it get such a sweet deal?
It's because we want to encourage business, since businesses produce things of value.
But how much does a landlord actually produce things of value, and how much is he just extracting value others are producing (a.k.a "rent")? That's an important thing to consider when we look at having this tax/tax break or not.
The distinction between extractive vs value-creating profits is very important.
That said, it's not automatically a "sweet deal", and identifying that difference is nontrivial. The same activity could be one or the other, depending on how it is done. Your example with a landlord is particularly thorny:
>>But how much does a landlord actually produce things of value, ...?
A good landlord creates a building from nothing, and maintains it in good condition for his/her tenants. What was an undeveloped parcel of land is now homes for all the families who live there. Considering all of the people yelling about lack of housing, that is something of real value. Even maintaining a building in good condition is a very expensive activity, and if the maintenance is not done, the homes will certainly revert to rubble.
So that good landlord is absolutely creating, for both his renters and society at large, serious value.
OTOH, a bad landlord doing superficially the exact same activity can be completely extractive - merely collecting rents and failing to maintain the building(s) in any way beyond what will keep them out of immediate trouble. The bad landlord extracts everything they can for current cashflow and allows the building(s) to degrade towards rubble, an anti-creative activity.
One is definitely creating value that is highly needed in our society, and the other is destroying and extracting it, yet both have the same business type, both have the same income and cost structure, etc..
Even more difficult, the same landlord can look like one or the other in different times - in high-demand times and/or markets, they can charge premium rents and profit while still doing lots of maintenance & upgrades, but in a down market, they may have high vacancy, and still lose money while doing the absolute minimum.
So, how do we tell the difference and tax them differently?
That's a serious question, and one which, if we can find an answer will really help the society improve.
Rent extraction from the underpriveleged for basic needs in a deliberately skewed market is hardly "business", it's raw exploitation at the systemic and the social level. Justify your habit of cannibalism however you may.
If I buy a widget for $100,000 and sell it of for $105,000 do you expect me to pay income taxes on the $105k or on just my $5k profit?
The former would be absurd and in most cases would make it impossible to be in business-- you'd take a net loss on every transaction unless your markup was greater than your tax rate. Good that went through fewer hands would be astronomically less expensive.
So why do you think that it's weird that a landlord doesn't pay taxes on the portion of his income that goes to the costs of operating the business?
> If you want a general complaint, perhaps the angle is that capital is taxed much less than labor, under some notion that lower taxation is necessary to get people with capitol to actually deploy it in investments.
Yes, I recall when cap gains taxes dropped significantly during GWB and was, sadly, happy. Of course, I was just a dumb 20-something and didn't realize how much of boon to the wealthy it was.
Please point to the "boon". If you mean people got to keep their jobs = boon, then I guess you are right. The problem is, wealth was transferred upstream, en masse, and not taxed anywhere near labor.
Here is some data that solidly debunks your disguised claim of "trickle down":
> It's a boon to anyone whose job was created by it as well
You then say:
> If you mean people got to keep their jobs = boon
No, I said the job in the first place is funded by investment. I couldn't have made it clearer.
If investors don't invest in your startup/scaleup then there is no job in the first place. Nothing about being grateful for keeping your job.
> The problem is, wealth was transferred upstream, en masse, and not taxed anywhere near labor.
You're thinking in terms of groups instead of individuals, and that the groups are static. You shouldn't (as it will lead to so many broken ways of thinking) and they aren't.
> Here is some data that solidly debunks your disguised claim of "trickle down"
It's not trickle down - I only go for nonpolitical theories, and the US left wing's labels to oversimplify and demonise some fairly standard economics doesn't hold up by that measure.
I'd rather you replied to what I said than straw man it. You will mislead casual readers by doing so.
It contains the ASSUMPTION that the favorable capital tax rate (vs labor tax rate) is NECESSARY for the investment to happen.
This is obviously not the case. People with capital will want to deploy it so that it grows, as long as the tax rate on the profits is <100%.
What we do not have is the curve - how high can the tax rate be set relative to the tax on labor income before investment is ACTUALLY discouraged?
Only an assumption, based on the obviously self-serving assertions of people who own capital, that higher tax rates will make them just sit on their money and not deploy it profitably.
As you can see above, I'm happy to debunk oversimplification & demonization from the LW or RW, but "trickly down" is pretty much what the RW called it when it was flogged as a concept in the '80s, that "freeing up capital" for the rich would trickle down to everyone in the economy. The ACTUAL result was the opposite. Ratios of executive vs worker pay only increased from ~70x to over 300x, and the share of the total GDP going to labor declined to the lowest point ever.
The actual fact of the matter is that with lowering tax rates on capital, the "boon" you speak of is actually available to fewer people than ever.
> The ACTUAL result was the opposite. Ratios of executive vs worker pay only increased from ~70x to over 300x, and the share of the total GDP going to labor declined to the lowest point ever.
You're assuming a cause effect relationship. The far more likely causes of this are automation (allowing more work done by machines than people) and globalisation (allowing reach of larger markets).
That's the mechanisms. As for the philosophy: I don't buy the idea that a CEO getting richer hurts me. What's important is that my standard of living is better than my parents', and my children's will be better still. If someone wants to risk it all for a big win then good for them. They will probably fail, and lose years off their life, but occasionally they will succeed. Only pointing at the people whose risk-taking paid off and saying "See!" is not a good way to understand (or communicate) the full picture of what's going on when people invest or run their own company.
Do we actually have strong evidence that these sorts of tax breaks actually stimulate this kind of economic activity to the degree where it's actually worth it?
It... doesn't seem like we do? I mean, it's not like pre-1990 we had skyrocketing unemployment and underinvestment in business, and lowering capital gains taxes fixed it.
Yes, the question is how much of a boon it needs to be.
The fact of the matter is that people with capital want to invest and grow that capital. It is absolutely false that if that activity is taxed, it will disappear. Just as obviously, if all capital gains are taxed at 100%, it will disappear. The question is the balance - how much to tax it so that the wealthy don't merely get wealthier at everyone elses' expense.
It may also be a good idea to tax underutilized capital, as land is taxed.
If you get all of that just right you may even extract enough money to pay for all the many governmental systems required to administrate it. Sadly none of that will have done anything as useful as an investment in a company that makes people's lives cheaper or better.
ummm, the mortgage interest deduction does NOT apply to rental properties, only your primary residence or a 2nd home that you spend at least 14 days or >10% of the time you rent it out. So, if you are talking about a fully rental property, it is incorrect.
I'm not saying that there are no advantages or deductions, only that this character is trying to portray it as the govt basically giving landlords all the funding to become landlords. If that were the case, he should simply do it — there's plenty of no/low money down ways to get into it —, but I notice that he is not doing it. It just smacks of a lot more attitude than fact.
