The treatment of consumption taxes on new homes is well known, whether the tax is a contemplated Value Added Tax (VAT) or the Fair Tax. In either case, taxes will be either included in the price and disclosed at settlement or separately charged over and above the price – although the price would be lower for not including taxes during the production stages. Business receipts taxes and residual payroll taxes will not be disclosed, but will still be paid, just as they are now. Indeed, payroll taxes for social insurance and the income taxes of everyone involved in building, selling and financing the house are implicit in both the price of the house and the interest rate charged to finance it. None of this will change the price of the house, although adding consumption taxes to replace some or all of income and payroll taxes will make these taxes more visible.
What is not often spoken of is the extent to which the Fair Tax or the VAT will be collected on the sale of used property. While these taxes won’t be paid explicitly by the buyer, no one should be surprised to see them on the seller’s side of the HUD-1 form.
The first place they will show up (whether VAT or Fair Tax) is in the realtor commissions. Currently, any taxes accruing to these transactions are hidden in the income tax paid by the agents and their staffs. If a VAT is enacted, any high income surtax retained will remain hidden, but some percentage of what was once hidden will show up as VAT. In a Fair Tax, the entire tax will be explicit, but the commission rate will likely be lower.
When a home is sold, there are often renovation costs that are due at settlement. Again, VAT or Fair Taxes will be due on these services, although again they will be paid by the seller in the same way real estate commissions are.
Home Owner Association or Condo Association Fees will also be subject to VAT or the Fair Tax. While in the latter case the fee will be lower because income taxes will no longer be paid for association staff or for utility company employees or contractors, all of these services will be subject to the Fair Tax. Utilities will have to offer two rates – one to associations, which are tax free and one to individual home owners, for whom the tax will have to be collected. When a used home is sold, usually condo fees are due for the remainder of the month by the buyer and often there are past due fees to be paid at settlement by the seller. For each of these, VAT or Fair Tax must be listed.
However interest is taxed under Fair Taxes or a VAT, points will be taxed in the same way. Indeed, if taxation is made explicit rather than implicit for finance charges and other bank services, such taxes will appear on whatever disclosure in necessary in signing the mortgage note(s) and any VAT or Fair Tax paid by the buyer will be added to the amount borrowed, so it will be taxed at least twice.
One last area where tax is due is for capital appreciation. The capital gains exclusion for home sales would no longer apply without the income tax and the tax losses for non-excluded gains no longer taxed must be either included in the Fair Tax rate overall or gains must be subject to tax upon sale. While this won’t be paid by the buyer explicitly, the need to pay such a tax will undoubtedly be considered in establishing the purchase price – especially if the seller is using the proceeds to “move up” to a bigger house. Even though the seller pays the tax explicitly, that tax increases the price of the home – so the buyer pays it implicitly – and if the buyer is financing the purchase with a mortgage interest will be paid on the initial implicit tax payment and tax will be paid on that interest as well.
Is this an increase in taxation? As I stated at the outset, banks, realtors, renovators and HOAs all have staff which pay income taxes. Cities do too, so even the property taxes paid by to escrow accounts includes some kind of implicit tax. Enacting a VAT or Fair Tax will simply make what was hidden explicit. In the end, if the same level of government services are demanded, the amount of tax actually paid will not change much at all.