Local Real Estate Comments and Ramblings

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Real Estate and The Fair Tax

The fair tax and home ownership

I believe that there would be benefits to the entire economy by implementing the fair tax. Just imagine the economic power of every American keeping 100% of their paycheck! ....Plus every American getting a "prebate check" every month to off set the tax on essential items.  

But what about my home interest deduction?

As the  Fair Tax relates to residential real estate this is the question that always comes up.  Here is the condensed answer.  Under our current tax system we make our mortgage payments with after tax dollars.  That is, our paycheck is taxed and then out of our take home pay we make our mortgage payment.  At the end of the year we can claim a deduction for interest that we have paid. Many people understand the benefits of using pretax dollars  for savings and investment.  Think of your 401k. (not it's reent performance, just the concept of a 401k (-:   ).  One of the big benefits that is always promoted about joining your company 401k is that you are able to contribute pretax dollars toward your investment.  You get an immediate return because those dollars are not taxed ( until you withdraw them later on  anyway).  Instead of encouraging debt and worrying about interest deductions your entire house payment PITI is paid with pretax dollars! You don't need to worry about your interst deduction because your entire payment - not just the interest - avoids any tax!

The Fair Tax encourages savings!

For the past many, many years Americans have been saving at a negative rate. Since the fair tax only taxes what we spend, money contributed to savings is not taxed. I can see at two immediate benefits to real estate from this.  ONE - people will once again start saving money toward a down payment.  Two - money will flow in to banks.  Instead of the gov't allocating money to recapitalize the banks they will actually have money from their own customers!  Loans for mortgages, cars, business expansion, etc. will be be more common and available.



For a very detailed analysis of the Fair Tax and housing check this out -
Diamond, John W.; Zodrow, George R. (May 5, 2008). "The Impact of H.R. 25 on Housing and the Homebuilding Industry". James A. Baker III Institute For Public Policy.

For more information about the Fair Tax visit www.FairTax.org




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Bob Southard, e-Pro, Realtor ®, Solid Source Realty, Inc. Buy a home, Sell a home, in Powder Springs, Marietta, Kennesaw, Acworth, Dallas, Hiram,and Cobb, Paulding, Douglas, North Fulton, South Cherokee, County, Ga. Call me for all of your real estate needs.

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Comment balloon 5 commentsBob Southard • February 15 2009 11:31AM

Comments

Always have loved the fair tax, but when were taxes "fair"...guess I'll just go on giving most of my income to the new "Stimulus" bill....oh, did that sound bitter? :)
Posted by Karen Fiddler, Broker/Owner, Orange County & Lake Arrowhead, CA (949)510-2395 (Karen Parsons-Fiddler, Broker 949-510-2395) over 10 years ago

Karen - thanks for the comment.  That's the point.  Our current tax system is grossly unfair.  The part that really gets me stirred up is politicians from BOTH parties using the tax code to "buy" our votes.  With the fair tax the legislators can still legislate, debate, and figure what programs to spend money.  They will still have plenty to debate and dis agree on.  But the taxes will be taken out of the arguments. The fair tax collects the money but the politicians will still argue about how to best spend it.

 

The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money"

                                                                                                                Alexis de Tocqueville 1805-1859

Posted by Bob Southard, e-Pro - Cobb, Cherokee, North Fulton (Atlas Realty Service, LLC) over 10 years ago

It sounds good!  but rewarding responsiblity, prudence and intelligence...?  come on, this is congress we're talking about.

Posted by Stuart Dobson (eLoanRates.org) over 10 years ago

Paying for a home with 100% pre-tax dollars will just lead to another real estate bubble.  It also sounds remarkably like the short-term thinking of politicians.

Drew

Posted by Loan Survivor Real Estate Financing Expert (Purchases, First Time Buyers, Pre-Approvals, Refinance) over 10 years ago

Stuart- How true!

 

Drew- I have to say that I dis agree.  Yes, if homes become more affordable we may see an increase in values.  We would also see an increased emphasis on home ownership because of being sble to pay with pretax dollars.  But I don't see a bubble unless the banks go back to irresespnsible lending practices which would add false fuel to the fire.  Borrowers would still have down payment and qualifying requirements to buy homes.  The fair tax would not determine the guidelins for borrower qualification.  It would mean that borroweres would be encouraged to buy and pay off their homes.

With no interest deduction there is no advantage to the long term debt.  People can pay ahead on their mortgage.  Once their home is paid off they could then put the money toward others savings and retirement.  All of those would also be with pretax dollars.

Posted by Bob Southard, e-Pro - Cobb, Cherokee, North Fulton (Atlas Realty Service, LLC) over 10 years ago

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