Home Ownership & Tax Policy: Capital Inequity & One Consequence (3Q21 Quarterly Newsletter)

July 15, 2021

I have thought long and hard about whether to write on the subject of income inequality. It is not that the data itself is particularly controversial. Actually, the data is reasonably unambiguous, and there is general agreement among economists and others competent in the matter that the phenomenon is real and fairly described. As is the case with complex social issues, however, once past the “simple” description of whatever the “facts on the ground” happen to be, controversy arises as different constituencies have different answers to such questions as “how did it happen?” and “what (if anything) is to be done about it?” And in framing answers to these and related questions, numerous conflicting policy proposals, passionate advocacies and often bitter disputes flow.

And I really don’t want to get snarled up in “conflicting proposals, passionate advocacies or bitter disputes.”

Instead, I am going to try and illustrate, by the use of personal examples, the extent to which my family has benefited from tax policies which added materially to our cash flow and, so, to our net worth – and how this turns out to bear on the subject of income inequality. I will keep this as objective and non-ideological as possible. (The phrases "cash flow" and "net worth" remind me that if this piece had a title it would be "Capital Inequality and One of Its Consequences, Income Inequality.” Because it is in popular usage I use the term ‘“income inequality” herein. But income inequality and capital inequality are two sides of the same coin. Income is both the source of and the fruit of capital. If, as the issue of income inequality is argued out and policies proposed, “solutions” which do not contemplate some methods of capital accumulation for low income earners will, in my view, fail in their purpose.)

One problem, in tackling this subject, is where to begin. As any CPA will tell you, the tax code is a maze of subsidies whose benefits extend to virtually any entity filing a tax return. So I am going to focus on just one subject among many possible: home ownership, and the subsidies associated therewith. And I am going to demonstrate, as accurately as possible, the benefits we have realized from residential-property-based subsidies. Most of this is from my memory, but even at 84, my memory is good, particularly for the milestones in my life between the ages of 21 and 65.

In 1964, after four years of marriage and apartment living, my wife and I decided to buy a home. We had been living pretty much hand to mouth, monthly income barely covering monthly expenses, and no savings. How to proceed? First, I discovered “no down payment” acquisition financing. We found a house in what my then-boss called a “blue collar community” (he did not mean it kindly) in Westchester near LAX. The price: $24,000 for 900 square feet, two bedrooms, one bath – built in haste after World War Two as a huge population surge to Southern California occurred. Financing? 80% first from the bank, 10% second from the seller, 10% third (a loan from my boss). We sold the house in 1968 for $28,000. We paid no tax on the gain. With the gain and the debt paydown we had about $8,000 of equity.

With the $8,000 we moved up market and bought our second home in the hills above Studio City. The price? $41,000 for 1,400 square feet of what was distinctly not a “blue collar community.” Financing? An 80% CalVet first at 6% (a good rate at the time, and assumable, which made any subsequent sale easier) and all our recent home sale equity. We sold the house in 1972 (by 1972 we had three children and 1,400 square feet was a bit tight) for $44,000. We paid no tax on the gain. With the gain and the debt paydown we had about $12,000 of equity. The $12,000 home equity was our largest single asset.

With $12,000 we bought our third home, about a mile and a half away, for $65,000. This home had 2,800 square feet on a third of an acre and was custom built. Financing? An 80% first from the bank and all the equity from our recent home sale (plus most of our then nominal savings). We sold this house in 1997 for $555,000 after adding about $150,000 in improvements over the years. We paid no tax on the gain. With the gain and the debt paydown we had about $450,000 of equity.

After the sale of our third home, we moved to Del Mar and bought the home in which we now live for $550,000. Financing? We were prepared to pay all cash but the seller offered us a first on favorable terms so we used the equity from our recent home sale and the seller’s short term first for the balance.

Anyone looking at this history, and particularly younger readers, might well argue that our experience is simply not replicable because the economics of home ownership have changed so drastically from then to now. Our current home, the one we paid $550,000, is worth $1.8 million. You are not going to get me to affirm that multiplying today’s home prices 75 times over the next 57 years is even thinkable, much less possible. Moreover, our experience in the California real estate market over those years may not be reflective of the experience of other parts of the U.S. (especially regions outside of coastal population centers). But as you will see, that’s not the point of this exercise. Keep reading.

If someone were to calculate the residence-related economic impact of tax policies/subsidies on our family’s economy, what (at least roughly) would that impact look like? And what is the relationship between our specific circumstances and income inequality?

Just to be clear ... here are the specific policies/subsidies on which I am focused, which I will translate into a back-of- the-envelope calculation by which our economic well-being has been – or, in one case (step-up in basis) will be – enhanced. (Another way to say t