By: Christopher Pascale
Mathematically speaking, your personal residence is not an investment – even mine, which has increased by 25% in 4 years. This is because it costs me to live there, but that’s the whole point of a home.
Contrary to what anti-home-owning people say, it can be very nice. As someone who has rented and owned, I prefer the latter. But not because it’s a good investment. In fact, owning a home is not an investment at all; it’s an expense that can allow you to get some of your money back through loans or liquidation – at best.
The reason my home is not an asset is because I only use it for personal living. I don’t rent it out in any fashion, and do not intend to.
Knowing this, it would be wise to reduce expenses where possible, especially when it comes to property tax.
Property Tax Is a Wealth Tax
To clarify the idea of wealth taxes, they are levied on what you own.
For example, in Argentina, assets worth more than $53,500 are taxed at a rate of 0.25%. For every $1,000 over that amount, you will owe $25. For every million, it will be $25,000, regardless of whether the wealth is liquid, like cash, or not, like raw land.
While the US does not claim to have a wealth tax, municipalities do.
Knowing this, you have to consider if it is worth it. Obviously, having wealth to pay taxes on is better than having none at all.
But is a bigger home worth it? Is a particular town worth it?
Without any reductions or discounts, my home should come with a property tax of about $10,000, which is not considered outrageous for Long Island. I only pay about ¼ that amount. My wife and I are able to reduce our annual tax bill by taking advantage of several options some people ignore or don’t know about, which will be discussed in full, along with some other plans we have to reduce it further.
STAR and Veterans Discount Programs
STAR is a School Tax Relief program afforded to New York residents. Most residents qualify for it. Reviewing the qualification criteria, my family fell under the enhanced STAR reduction because so much of our income is tax-free.
In addition to this, as disabled veterans, my wife and I receive a double discount afforded to members of our community. The result is that instead of paying more than $10,000, this year we will pay $2,700.
In 2019 we will no longer qualify for enhanced STAR, because my wife is working full-time now that she has completed graduate school (as noted in Wife on F.I.R.E.). However, this is slightly counter-balanced by the tree we recently removed, as well as the deck that will be replaced by a patio.
Trees, Patios and Driveways
You’re Paying for the Trees
Please don’t think I’m some tree-hating maniac. I was a big fan of the 100-year-old oaks on my property in DeRidder, Louisiana, particularly as the temperature hit triple-digits. In my current home, there is an unusually large Japanese Maple that is the highlight of our garden. But you need to know that if there’s a tree you can do without, or make better use of by converting into fuel, don’t be afraid to get rid of it. It will save you money.
A challenge is that this goes against the conventional wisdom that trees make your property more valuable, and therefore, they are always good.
But how good is something that does nothing for you while costing you every year in both labor and cash?
A Deck Adds to Taxes; Patios Do Not
A deck is a permanent structure that adds to its taxes as such. However, some patios will not. Why? Because a patio not set in a foundation is not permanent. The key is to use pavers, or other materials deemed temporary. For this reason, a pool will increase the taxes on your property, as will a shed or garage, but not a carport.
I currently have a deck. Knowing what I know, it will likely be torn down in the next 12 months and be replaced by a temporary patio. By keeping the deck, I’m paying for it repeatedly in both maintenance and taxes.
Add a Driveway without Additional Taxes
Sticking to the theme of temporary materials, my current driveway will never be paved. It is badly in need of a makeover, since it’s just dirt and grass with ruts in it. However, by improving it with pavement, I’ll add to my tax burden. The alternative is to have it leveled, then add rock.
A driveway is just a place to park our cars, and a car is just garbage you drive around. For some, there is a valid argument that very valuable automobiles should be given a solid surface to be kept. To this, I agree. But that place should be a garage for protection against the weather, not a private street open to lightning and hail.
Again, by paving, you pay repeatedly. By making your driveway temporary, your taxes remain the same.
Is Another Bathroom Worth It?
My home has 1 bathroom for 6 people, 5 of whom are women. Within the next year it will be fully replaced, and I am considering having the piping extended to where there could be a second bathroom. However, I’m in no rush to complete the installation.
As noted earlier, my property taxes are about $2,700 this year. For me to have another bathroom put in would require not just fixtures and framing, but a dormer, which would increase the living space. My rough estimates have concluded that adding a bathroom could bring the property taxes up to $4,000 per year.
Even if the dormer and bathroom are installed for under $10,000, the wealth tax would go up by $1,300, meaning that as the bathroom degrades (as it should, because it’s meant to be used), I’d be paying for the construction over and over again every 7-8 years.
After 15 years, a remodel would likely be due but having spent $30,000 by that time, might not be possible. Also, in 15 years, my youngest daughter will be 22 and my oldest will be 32.
If we successfully enact the Kids on F.I.R.E. plan, it will just be my wife and I at home. And while 2 bathrooms will still be suitable, we may simply want to sell and buy a nicer, smaller home.
Sometimes You Might as Well Just Move
And that brings us to something worth considering: Selling the home as a means of optimizing.
I really enjoy my current home for the large rooms we use for entertaining, and particularly like that I’m a minute’s drive from the parkway for a much shorter commute. Additionally, our yard is so large that even after installing a 900 sq. ft. playground, there’s still plenty of room left over. Lastly, I’m glad there are bedrooms on the first floor, so I don’t have to climb stairs if my knees are shot when I’m old.
But as much as I like it, this is just a piece of property, so I’m not going to get caught up in things like pretty trees if they are in my way and costing me money.
We removed one tree recently, and have our eyes on another. The deck needs to go because it’s costing me money without giving added value, and while my dirt path needs an upgrade, I don’t see myself purchasing a sealed blacktop or cement driveway.
Can these upgrades be optimizations? Absolutely. A second bathroom certainly would be, but at what cost? I’m 36 years old. If replaced today, it will cost at least $10,000 up front, then $50,000 by the time I’m in my 70’s, and that’s not counting on it ever being remodeled.
I’m not against this specific upgrade, nor should you, but you must first count the cost. For me, I’ve decided the cost is actually worth it, but in doing so, it might be more optimal to simply buy a nicer home, perhaps even one with 3 bathrooms, as well as a full laundry room, which I also don’t currently have.
And an optimal way to get into that nicer home, is to keep your money instead of spending it away in taxes.
Christopher Pascale is an author, accountant and adjunct professor from Long Island. He is the former CFO of Portfolios with Purpose. His finance writing has been featured on the AIPCA’s “Tax Matters” page, WealthyJoe.com, and others. He is also the author of a book of poetry, and is working on a novel due to be released in 2019.