Lawrence Yun, Chief Economist for the National Association of Realtors posted a very interesting article. He poses a very interesting question and the answers will vary from local market to local market.
As he articulates in his article – this tax is unevenly imposed. Meaning landlords earning more than $200,000 year will be taxed the 3.8% on rental income while others earning less than $200,000 will not be. With that tax structure it does not necessarily push rents higher, it depends on the local market conditions…
As he eloquently states, …as with most taxes, those who have to fork over the money to the federal government and those who actually suffer the burden of the tax will not be the same”
….how much of the 3.8 percent health care tax on rental income will get shifted to tenants as a higher rent? It will depend on what economists call elasticity of supply and demand curves. The possibilities are:
- If tenants have many options – like living in their parent’s basement or taking on a third roommate – then the tax burden will reside with landlords and not renters.
- If tenants do not have many options – after getting tired of parent’s nagging or the loud third roommate – then landlords will witness a strong demand for their rental properties and can raise rent.
- If landlords have many options – like getting out of the rental property business and buying stocks instead – then fewer rental properties will be built over time and fewer rentals will be available, thereby resulting in higher rent for tenants.
- If landlords do not have many options – because of an unwillingness to dump properties on to the market in order to avoid the capital gains tax or because of an historic attachment to the property – then the landlord will bear the tax.
Let’s consider the Twin Cities metro area. Current market conditions are hovering around a 1% vacancy rate for rentals which is extremely low and is already pushing rents up. Simple Supply & Demand… Now as of January 2013, a portion of the Landlords (ones that earn over $200,000 / year) will be taxed an additional 3.8% on rental income. There is not much incentive for landlords to keep rents low to meet the market because demand is so high, so rents will likely go up. It will take some some time before the market prices this in, but it looks like it will locally.
Lawrence Yun also raises another important point, what will this do to the Investors? Will they continue to invest into supplying rental properties to the market or will they seek other investments?
I recommend reading the National Association of Realtors PDF on the new 3.8% Tax:
Details of the 3.8 percent tax are provided here (PDF). It contains only the incidence of the tax and does not feature any particulars of the tax shifts into rents.
Are you still sure renting is better is than owning?