Home National housing How Homeowners Are Avoiding Taxes And Fueling The Housing Crisis

How Homeowners Are Avoiding Taxes And Fueling The Housing Crisis

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Opaque property laws that make it easier for homeowners to avoid paying taxes are worsening a nationwide housing crisis fueled by inflation and a shortage of low- and middle-income housing.

Limited Liability Companies – or LLCs – are a common way for landlords to own the real estate on which they can charge rent. But LLCs often hide the identities of the people who support them, allowing owners to be shielded from legal consequences when they don’t pay their property taxes.

Properties can then be subject to tax foreclosure and effectively taken off the market in cities where housing supply is scarce, further driving up prices and forcing tenants to live far from where they work. .

Studies have “linked LLC ownership to real estate divestment, tax forfeiture, even forfeiting properties altogether,” Princeton sociology professor Matthew Desmond told the Senate Banking Committee on Tuesday. , housing and urban affairs.

“One of the landlords I spent time with in Milwaukee, I asked him, ‘What happened to that house that I spent a lot of time with?’ And she said, ‘I just took it back to town.’ And what she meant was she just stopped paying taxes on it and let it go into tax garnishment,” Desmond said.

“Tax foreclosure shouldn’t be part of a business strategy, but for some owners who use LLCs, it is,” he added.

A 2019 study by Harvard Joint Center for Housing Studies fellow Adam Travis linked housing decay and disinvestment to LLCs, which became widely available to landlords in the 1990s.

“Over the past two decades, the advent and spread of the limited liability company (LLC) has reshaped the legal landscape of rental property,” the study found. “Increasingly, rental properties are owned by commercial organizations that limit investor liability, rather than individual landlords who own property in their own name.”

The study found “signs of housing divestment increase as properties shift from sole proprietorship to LLC ownership.”

The share of rental properties held by professional landlords is increasing across the country as rents and mortgage rates are driven higher by increases in Federal Reserve interest rates.

“Professional investors made a record 28.1% of all single-family home purchases in February,” a July report from real estate market data firm CoreLogic showed.

Since the onset of the pandemic in early 2020, the share of home purchases made by investors has doubled from 14% to around 28%, according to data from CoreLogic.

Lawmakers from both sides have noted that there are concerns about the increase in holdings of business owners.

“It comes up repeatedly from witnesses, and my colleagues have pointed to the increase in the percentage of single-family homes, especially those owned by private investors. And there are a lot of people who are very concerned about that,” Sen. Pat Toomey (R-Pa.) said during Tuesday’s hearing.

Sen. Catherine Cortez Masto (D-Nev.) echoed Toomey, saying, “I, too, am concerned about institutional investors and the impact that’s having in Nevada, why we’re seeing all these properties being purchased.”

“I know that in my state in 2021, 29% of homes purchased in the Las Vegas metro area were purchased by investors. And the challenge is that I can’t say how many are institutional. I think it has everything to do with what I heard earlier about too many LLCs and not enough transparency,” she continued.

Across the country, property values ​​have risen rapidly in the wake of the coronavirus pandemic, which has led to a dearth of new construction projects, doubling the pace of inflation. The national Case-Shiller house price index rose nearly 20% from May 2021 to May 2022, while consumer inflation rose 8.6% over the same period.

Home prices have risen about 20% and rents about 12% between 2020 and 2021, according to a joint report on national housing conditions from the Harvard Graduate School of Design and the Kennedy School of Government.

As families are squeezed out of the market by investors, legal mechanisms such as limited liability companies that are favorable to business owners are under intense scrutiny.

“There’s a theme there: out-of-town investors are hiding behind a cloak of anonymity,” Laura Brunner, director of a government-backed real estate development agency in Cincinnati, said Tuesday. to the Senate Banking Committee.

“Last summer, we asked the City of Cincinnati for the names of the five worst landlords,” she said. “It took months of rigorous research to discover that over 4,000 single-family homes in Hamilton County had been purchased by these five owners. Monitoring acquisitions was a daunting task due to the high volume of LLCs used. »

LLCs and similar legal designations, like S corporations, were originally used to encourage entrepreneurship, so people could undertake risky business ventures without risking personal bankruptcy. Today, limited liability companies are more often used as devices to maintain anonymity by wealthy owners, according to experts in the real estate industry.

“I represent the wealthiest people in the world and some of the most famous people in the world, and they won’t buy a property unless it’s in the name of an LLC, sometimes multiple LLCs, and they do. are doing in order to keep that anonymity, so people don’t know who is buying the property,” New York real estate attorney Adam Leitman Bailey said in an interview.

“In a nefarious way, it allows people from different countries to buy property in another country, to buy property in America. Let’s say they’re trying to hide money. They can do it using an LLC, and people won’t know who they are.

Bailey said the practice was common in prestigious cities like New York.

“As a real estate attorney, New York is a phenomenal place. If you have money that you want to make sure it doesn’t get taken away from you in another country where it could be taken away or seized, you can buy an apartment in New York and use it as a safe deposit box, and just buy it in cash as part of an LLC, and only the lawyer and the client will know who owns the LLC. money that way. Real estate moves very slowly and nobody asks questions,” he said.

Housing issues have taken center stage in both chambers of Congress hearings in recent weeks.

The Senate Finance Committee held a hearing in July on the role tax incentives could play in building more affordable housing, and the House Ways and Means Committee recently held a hearing called “Nowhere to Live: Profits, Disinvestment, and the American Housing Crisis.”

The Treasury Department last week announced new rules to fund more affordable housing loans as part of the US bailout, and the White House on Tuesday hosted a virtual summit on boosting government housing assistance. emergency and long-term eviction reforms.