Home-flip tax would punish the good guys

Memo to misguided pol: Leave fixer-uppers to the professionals

National /
Apr.April 06, 2022 09:00 AM

Chris Ward, California assembly member for the 78th District (Twitter/asmchrisward, iStock/Photo Illustration by Steven Dilakian for The Real Deal)

Just when you think politicians cannot get any more daft about housing, along comes Chris Ward.

The California Assembly member wanted to give ordinary homebuyers a better shot at competing with home flippers, so he introduced a bill adding a 25 percent tax on flippers’ capital gains.

What he failed to mention is that California already taxes flip profits.

In fact, it taxes them at the same rate as regular income — as high as 12.3 percent, the most of any state. The federal rate on these gains is typically 20 percent, or 23.8 percent for high earners. Combined, that’s as much as 36 percent. Add Ward’s tax and the maximum rate would be 51 percent.

Virtually none of the coverage of Ward’s bill mentioned this, leaving the impression that house flippers get away with all the spoils. But the legislation itself was deeply flawed.

Why slap an extra tax on flip profits, as if they are cigarettes? Home flipping does not cause cancer. To the contrary, it can benefit society.

For the most part, flippers don’t simply buy properties and throw them back on the market. They replace leaky roofs, broken plumbing, dated interiors, ancient appliances, hideous facades, abandoned landscaping and anything that’s not up to code. That takes money, expertise and sweat.

Flipping helps maintain our housing stock. Does it make homes more expensive? Of course. Improvements cost money.

To his credit, Ward, whose 78th district spans several San Diego coastal neighborhoods, does not argue that homes should be left to deteriorate to maintain their affordability, as some advocates in New York do. Rather, he says ordinary homebuyers could hire contractors to fix them up. But that suggestion ignores how people typically shop for homes.

The vast majority do not want fixer-uppers. They want turnkey homes, and don’t want to figure out where to live until their new home is ready. This has become even more pronounced during the pandemic, as any agent will tell you.

Aside from all that, Ward’s justification for the bill doesn’t hold up.

The bill claimed that 51 percent of Southern California home purchases in the third quarter of 2021 were made by investors, nearly three times the national figure, 18 percent. Turns out, that was wrong. Ward’s office has since amended the bill text to say that investor-buyers represented 51 percent of the “growth” of sales from the same quarter a year ago.

Not 51 percent of sales, but 51 percent of the growth of sales.

Investors’ actual share of Southern California sales was 17.7 percent, right around the national average.

“Forgive me if this makes your head spin, but it’s important because bad math is how bad laws happen.”

Erik Engquist

Some media coverage of Ward’s bill still has the incorrect statistic. (The Real Deal has corrected its story.)

Ward probably misinterpreted the data from this opinion piece in Southern California paper, which deceptively stated: “Local investors bought 2,142 more homes this summer vs. 2020’s third quarter — or 51 percent of the region’s 4,228 overall sales increase.”

Forgive me if this makes your head spin, but it’s important because bad math is how bad laws happen.

Here’s a better way to view the data: A year earlier, Southern California investors’ share of home purchases was 14.6 percent. It increased by 3.1 percentage points, or 21 percent.

Even that is deceiving, because the year-ago figure was unusually low: Investor buying plunged at the onset of the pandemic, from 1 in 6 home sales to barely 1 in 10, according to Redfin. The jump in 2021 represented a return to its historical trajectory.

That trajectory is certainly up. Investors’ share of home purchases has tripled since 2000, when it was 6 percent. Since the housing crash, that has been primarily because of investors buying homes to rent them out, not to flip them.

If Ward wants to stop the rental trend, his flip tax is especially misguided, because buyers could sidestep it by renting the home out for 7 years, then selling it. The tax would incentivize that.

Industry blowback to Ward’s bill was immediate, prompting the legislator to say he’s open to amending it. He would be better off withdrawing it.

Here’s why: If investors buy too many homes and make them rentals, rents would come down. Investors would then sell some of the homes to the ordinary buyers that Ward wants to help.

Capitalists make money selling what people want, like nicely renovated homes, not by trying to rent homes to folks who prefer to buy. The problem with California’s housing market is that politicians like Ward have wrapped a tourniquet around it, limiting supply, and perpetuated property tax policies that discourage selling.

Putting home flippers out of business does nothing to lower costs. It does mean you’ll have to rip out that shag carpet yourself.





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