Before his visit to the University of Massachusetts, Amherst on Thursday was cancelled due to a scheduling conflict; I was looking forward to sharing my concerns with Governor Deval Patrick. If I didn’t know better and had a bigger ego, I’d say that he cancelled because he somehow knew that I had planned on doing so. I voted for the governor twice and am disappointed that he would propose throwing the real estate market under the bus now that he has decided not to run for re-election, especially while it is trying to recover from being run over by one of the worst financial crises in history.
The reason for the governor’s visit to UMass was to tout his tax plan to raise $1.9 billion for transportation and education, which includes proposals that will likely have an adverse effect on the Pioneer Valley real estate market.
When a home owner sells their home, they have an array of expenses to contend with. They have to get their septic system inspected if they have one; and if it fails, they need to pay for what could be a costly repair. Sometimes a seller needs to pay for repairs to the house to facilitate a sale as well. They also have to pay their attorney to handle the legal mumbo-jumbo. Of course, we should never forget that home sellers need to pay their REALTOR® a commission for working so hard to get them more money for their home than they would have otherwise, even after they paid said REALTOR’s® commission.
What’s more, the commonwealth already requires that home sellers pay for tax stamps. Tax stamps cost home sellers $4.56 per thousand dollars. The tax stamps for a $200,000 house would cost $912 (200 X $4.56), for example.
The one thing that a home seller has going for them is that they are not taxed on the capital gain―the difference of what a home owner paid for their home and what they sell it for when the latter is greater―up to $500,000 for married couples and up to $250,000 for single people was not taxed by the federal government or by the commonwealth. However, the governor wants to take that exemption away from them.
Patrick wants to tax the equity at 6.25%, according to the Massachusetts Taxpayers Foundation. So if a home owner bought a house for $250,000 and sold it for $300,000, they would be taxed 6.25% on $50,000.
You would think that would be enough, but the governor wants to take even more away from the home seller as part of his plan. He also wants to take away the tax credit for a septic system repair, which is currently $6,000 over 4 years, and the lead-based paint removal tax credit, which is $500 to $1,500.
These proposals may seem relatively insignificant to someone with a $1.5 million home on the market, as the governor does, but they are significant to the rest of us.
The impact of these proposals threatens the recovery of the real estate market. Fewer people will be able to afford to sell, so less people will be able to buy. Those who are looking to move up the real estate ladder for a bigger house for their growing family, growing needs, or growing portfolio will be unable to do so. Fewer people will be able to buy their first home because less people will be able to afford to sell their first home.
This is to say nothing of the fact that most middle-class home owners lost considerable wealth when home values dropped as a result of the mortgage crisis. Many home owners can’t sell because they owe more than what their property is currently worth, while others lost a significant portion of the equity they had acquired. I don’t see how it a good to encumber home sellers further by increasing taxes and eliminating deductions as the real estate continues its recovery. Further, the jobs that result from home sales will disappear when fewer people sell their homes.
If the past 6 or 7 years have taught us anything, it is that real estate is the bedrock of our economy. The bedrock of our economy is just starting to come back, but we also still face challenges. Single-family inventory is low, it is harder for home buyers to qualify for a loan, FHA loans have recently become more expensive, FHA loans for condominiums are harder to get because as a result of stricter guidelines, home inventory is low, and the United States Congress likes to throw sticks in the spokes with ever-perpetuating gridlock prolonging uncertainty that further threatens the recovery. Sisyphus had less obstacles.
So in addition to the expenses that a home seller faces, and despite the challenges that the real estate market faces as it claws its way back, the governor of Massachusetts wants to create another obstacle by taxing home owner equity and eliminate valuable tax credits.
Perhaps I am biased, but I don’t understand why this portion of the governor’s plan to raise revenue isn’t a bigger story on the front page of every newspaper in Massachusetts. So help spread the word. Please share this article and write your legislator and the governor to ask them to leave the bedrock of the economy alone. The real estate market can’t afford it and neither can the economy.