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YOU DECIDE: Do you want your home's value to rise?

March 23, 2007

By Dr. Mike Walden
North Carolina Cooperative Extension Service

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.
The wealth that households own in their home is, by far, their major asset. Data from the Federal Reserve show that close to 40 percent of household wealth is real estate. So when home values rise, homeowners' wealth goes up.

This means when owners sell their homes, more cash falls into their hands. But with today's sophisticated financial markets, homeowners don't even have to wait to get cash out of their homes. Loans, such as home equity or second mortgage loans, allow owners to borrow against the wealth in their property. Indeed, this kind of borrowing has been an important element in fueling consumer spending in recent years.

But there's another aspect to rising home values that isn't as positive for owners. Owners must pay taxes on their homes in the form of property taxes. Property taxes date back to the early days of the country (and North Carolina) and today account for almost three-fourths of local government tax revenues in North Carolina.

There is logic for using property taxes to pay for a large part of local government functions. Local governments spend a great deal of their budgets on public infrastructure, like roads, schools and water and sewer systems. It is well documented that improvements in these local public services can cause property values to rise. Therefore, taxing the economic base -- here homes and other local real estate -- that directly benefits from the public spending makes sense.

However, a difficult situation can occur when large increases in property values are combined with large property tax increases. Property taxes are paid out of an owner's income, not his wealth. The problem is that income and wealth may not change at the same pace. In fact, usually when property values are rapidly rising, they're outpacing the gains in the owner's income.

Here's where a real crisis can occur. What happens if your property value rises so much -- far outstripping the increase in your income -- that you can't afford to pay the property taxes? Your only option may be to sell the property.

Now, by selling the property, you'll reap a lot of cash. But what if you don't want to sell and move? What if you love your home and land and don't want to live anywhere else? Should you have to move just to pay the property taxes, even if you'll be handsomely rewarded for doing so?

These are tough questions for which there aren't easy answers. North Carolina does partially address the dilemma for low-income elderly and totally and permanently disabled homeowners by excluding the greater of $20,000 or half their property's appraised value from taxation. Of course, this doesn't help other households who are in the same situation.

One idea that has been floated is to defer some of the property tax for high-wealth/low-income owners. Here, qualifying households who saw a big jump in their taxes because their property values soared would not pay all of the associated tax increase now.

Instead, some of the increase would not be paid until the property was sold. The owner would still owe the total tax bill, but they could wait to pay some of it at the time they decided to move, when presumably cash would be available from the sale.

Another idea is to move away from taxing property to other forms of taxation, like the sales tax. Of course, this raises other issues, most notably for the sales tax, that it may be a tax where lower income households pay a higher effective rate.

In some ways, property owners have a love/hate relationship with their homes and land. Owners want their property to be worth more, but large increases in value can trigger big tax hikes.

Deciding how to resolve this issue is a big question for local governments.

What's your solution?

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Dr. Mike Walden is a William Neal Reynolds Professor and extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html

Posted by Dave at March 23, 2007 08:56 AM