My $14,897 Property Tax Bill for 2014

I just finished writing the property tax checks for 2014. This year was a bad one. The worst yet. Almost $15,000 bad. The total is for eight properties. The taxes in Nashville, TN are due at the end of every February for the previous calendar year. I expect the expense each year. It is not a surprise. But just because I know I have to send off thousands of my dollars, doesn’t soften the blow when it happens. I wait as long as possible, until the deadline every year. I don’t want part with the cash until the threat of a penalty (interest) is about to be enacted. So I write this article with a full understanding that I run the risk of sounding like an old curmudgeon complaining about taxes. I know that governments need funding to operate on the local, state, and federal levels. However, I want to take time to explore the subject of taxation, specifically property taxes.

I have improved and added value to every property that I have ever purchased. I have taken vacant, foreclosed properties with overgrown yards and turned them into neat, quality rental houses. I have added significant improvements to a number of properties including new roofs, windows, and landscaping, adding appeal not only to the house that I own, but the surrounding block and street as well. I have completed entire renovations that lead to higher assessed tax values by the city’s appraiser. The new value means that buyers will be paying increased property taxes for years to come. I have created two new building lots through re-subdivision of property where over $700,000 worth of new house construction has been or will be built. Yes, the city profits again through the collection of property taxes on houses that didn’t previously exist. The city also gains from every transaction that I make, whether buying or selling. These transfer taxes cost about four tenths of a percent (.4%) of the sales price, which sounds small, but adds up to thousands of dollars on multiple transactions. There is no doubt that Nashville’s government treasury has benefited economically from all of my real estate endeavors. So what is my reward from the city for these efforts? Higher property tax bills.

Okay, Mr. Urban Investor, do YOU have a better suggestion? Well yes, as a matter of fact, I do. Thank you for asking. Flatten the tax rates so they are based on a household and not on the sliding scale of appraised value. My family consumes the same amount of government services whether we live in a $100,000 house or a $1,000,000 house. The property tax difference between these two hypothetical houses is about $10,000 annually. Why would we have to pay nearly $10,000 more a year in property taxes if my family chooses to live in a bigger, nicer house? We wouldn’t use any more government services. Flattening the rates and applying them to all households would mean more equal taxation, a wider base (every household paying), and a more politically accountable city. But measuring the level of government services consumed has never been a determining factor for how to levy taxes. Instead, the normal view of higher taxation of the wealthy prevails. The more expensive the house, the higher the taxes.

Why should renters not pay any property taxes at all? Renting residents use the same roads, police, and libraries. Their children have access to the same public schools. The common argument is that renters are paying property tax in the form of rent. That may be the case, but Landlords are the ones writing a check for the taxes, regardless of if the rent gets paid or not. Landlords have to factor in the risk of raising rents when property taxes are raised. If the increase is passed on to the tenants, they may move for a cheaper option and leave the landlord with a vacant unit. Additionally, renters can live with a roommate or family and lessen the perceived tax burden by sharing the monthly rent.

As much as city officials talk about affordable housing, it doesn’t seem like many efforts are done to curb this cause and effect between higher taxes and higher rents. If city officials really wanted to lower rents, they would enact a policy that lessened property taxes. It is a well documented fact that higher taxation on a product or service results in less of it, while lower taxes produce more of it. Perhaps owners of multiple properties such as myself could pay the full rate for my primary residence, but get a discount on the taxes for rental properties. That would definitely lessen the burden on landlords and tenants alike.

Owners of multifamily homes in Nashville, TN are taxed at a higher commercial ratethat is 40% of assessed value compared to 25% of assessed value for the regular residential rate. Commercial properties are also taxed at this commercial rate that is 62.5% higher than residential. Why should a business owner who is running their accounting office out of a commercial building pay a higher rate than if they operated out of a home? This individual is already paying for government services by the property taxes on their residence. Why should they be taxed again for owning a commercial building? Not only are they taxed again, but 62.5% higher for the same appraised value. Somehow this became an accepted method of taxation, and the vast majority of municipalities follow the same basic plan, regardless of how logical or illogical it is.

Another accepted tradition is for homeowners to pay their property taxes with their monthly mortgage payment. The amount going toward the taxes is placed in an escrow account and then paid in full when due. This is done for the purposes of the lender, to insure that the taxes are paid and there isn’t the threat of losing first lien position for unpaid taxes. Many times the property owner just makes the monthly payment, which usually includes the insurance, too, and isn’t even aware of how much they are paying for property taxes. If they had to write one check for the total every year, I think there would be a bit more backlash. Instead, the property taxes are frequently paid through automatic bank transfers, which keeps these property tax totals broken into twelve more digestible bites, and somewhat hidden from view.

Ultimately I view property taxes much like I view income taxes. I have to pay them, and there is no use getting too worked up about it. Two years ago I paid nearly $30,000 for my 2012 federal income taxes. That was not fun. I itemized and deducted everything legally possible, but to no avail. After that payout, I intentionally shifted my business approach away from the high profit fix-and-flip renovations, and moved toward more tax-friendly passive rentals and less-profit, but way easier “wholetail” deals (finding discounted deals off of the market for wholesale prices and selling them on the MLS for retail prices). I vowed to never pay that much in income tax again. Nearly every government enacted policy results in unintended consequences. Hitting that higher marginal tax rate killed my initiative to try to earn as much as possible. I decided to work smarter instead of harder. When I’m sending that high of a percentage to the IRS, why bother to hustle for the extra dollars?

I know there are plenty of property owners around Nashville who have been sending out property tax payments year after year that are way larger than what I am paying. Does it ever get easier? I try to reframe the situation and just think of taxes as a cost of doing business. The hard part is accepting how expensive that cost has become.