There is a housing shortage in the U.S. largely driven by investors buying up all the available housing [1]. This, in combination with high interest rates and existing home owners staying put as they can't afford a new, better house means that nothing is being built. Especially not low-margin affordable housing.

Definitions:

For the purpose of this article, the following definitions apply:

Investor: Any individual or entity [2] that owns a dwelling and does not occupy it.

Homeowner: Any individual that owns a dwelling and lives in it full-time. Full time is defined as more than 8 months a year, making the dwelling the primary residence. By definition, a homeowner cannot have more than one primary residence.

Primary residence: If an individual owns only one home, it is the primary residence, if the individual owns more than one, one can be declared as the primary residence, subject to the rules below.

Taxation as dis-incentive

Any investor-owned dwelling is taxed as follows:

  • if unoccupied: 90%
  • if rented: 50%

The Primary Residence, if occupied by the owner for 8 months a year or more, is taxed at 0%, even if unoccupied the rest of the time.

If an individual owns more than one home and doesn't live in any one more than 8 months in any calendar year, the primary residence is taxed at 0% while owner-occupied, otherwise it is taxed like an investor-owned dwelling.

The Primary Residence can be defined as the most expensive owned by an individual. That way the tax benefit is maximized.

Any dwelling other than the primary residence is taxed at 90% by default. It is the responsibility of the owner to prove to the taxing authority that it is rented or owner-occupied to obtain the lower tax rates.

What would this do?

  • Encourage home ownership.
  • Discourage hoarding of housing by investors, especially if unoccupied.
  • Discourage speculation, in buying/selling and short-term rentals.
  • Provide an incentive to accept lower rents instead of keeping a property vacant.
  • Prevent losing your home due to financial hardship and not being able to pay real-estate taxes.
  • Lower the cost of home ownership for the essential primary home.
  • Raise the cost of ownership for additional homes.
  • Shift school funding to those more capable of supporting it.
  • Reduce homelessness.

Case studies

1 - Second home / vacation home.

No different from investor-owned homes.

  • If unoccupied, taxed at 90% for the months it's unoccupied.
  • If rented, taxed at 50% for the months it's rented.
  • If occupied by the owner, taxed at 0% for the months of occupancy.

2 - Short term (less than a year) rentals, month-to-month, and airbnb.

Whole dwelling when the owner not present:

Short term rentals are even more expensive than even month-to-month ones, so the investor is making even more money and thus can afford the high tax of 50% for the month in question, even if the dwelling is not occupied for the whole month. This is essentially an investor-owned home. If the dwelling is unoccupied for a whole month, it reverts to being taxed at 90%

Rooms when the owner also lives in the dwelling:

This is an owner-occupied home, so the fact that the owner is sharing it with paying renters makes no difference. The home is still taxed at 0%

3 - The snowbird situation

People that own 2 homes and alternate between them. If one home is lived in for more than 8 months, it's the primary home and gets taxed at 0%, the other one then becomes a vacation home and this situation reverts to case 1 above.

If neither home is lived in by the owner for a minimum of 8 months, they both are considered investor-owned homes and taxed at 90% if unoccupied, at 50% if rented and at 0% when occupied by the owner.

If an owner lives in one home for 6 months and the other for 6 months, the owner is entitled to 12 months of 0% tax and 12 months of 50% or 90% tax for the respective house depending on whether it's rented or not.

Transition from the status quo

When this property tax regime is implemented, it will make it expensive to own unoccupied housing, likely resulting in hedge funds and other investors trying to sell the newly non-profitable housing stock. This will increase supply and lower prices.

At lower prices, more people are likely to be able to afford to buy their first/primary home. Furthermore, their ownership is now more secure than ever because there is no tax bill to pay and owning a home does not require an income.

Due to the incentive to rent rather than keep an investment property vacant, rents are likely to go down.

[1] https://patch.com/new-jersey/newarknj/corporations-own-most-newark-s-homes-new-laws-are-pushing-back

[2] Obviously a corporation, limited partnership or other fictitious entity cannot occupy a dwelling.