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How landlords are evading taxes and fueling the housing crisis

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Opaque property laws that make it easier for property owners to avoid paying taxes are exacerbating a national housing crisis fueled by inflation and low- and middle-income housing shortages.

A limited liability company (LLC) is a common way of owning real estate for which the landlord can charge rent. However, LLCs often hide the identities of the people behind them, allowing property owners to escape legal liability if they fail to pay their property taxes.

In cities with housing shortages, real estate is subject to tax foreclosure and is effectively removed from the market, driving prices even higher and forcing renters to live far from where they work.

Matthew Desmond, a professor of sociology at Princeton University, told the Senate Committee on Banking, Housing, and Urban Affairs on Tuesday that “the ownership of an LLC can be defined as an asset investment recovery, a tax waiver, or even a complete exit from the asset.” Research is being conducted that could lead to evictions,” he said.

“I asked one of the landlords I was with in Milwaukee, ‘What happened to this house I’ve been with for a long time?’ ’ And what she meant to say was, she stopped paying taxes on it and let it go to the tax foreclosure,” Desmond said.

“Tax foreclosure should not be part of your business strategy, but it is for some landlords with LLCs,” he added.

A 2019 study by Adam Travis, a fellow at the Harvard Center for Co-housing Studies, linked housing disrepair and investment failures to LLCs, which became widely available to property owners in the 1990s.

“Over the past two decades, the emergence and proliferation of limited liability companies (LLCs) has reshaped the legal landscape of rental property,” the study found. “Rental properties are increasingly owned by corporate organizations that limit investor liability, rather than individual landlords who own the property in their own name.”

The study found that “indications of a decline in residential investment increase as properties move from private ownership to LLC ownership.”

The percentage of rental properties owned by professional landlords is increasing nationwide as rent and mortgage rates are rising due to interest rate hikes by the Federal Reserve.

Professional “investors accounted for 28.1% of all single-family home purchases in February, a record high,” according to a July report from real estate market data firm CoreLogic.

Since the pandemic hit in early 2020, the rate of homebuying by investors has doubled from 14% to about 28%, according to CoreLogic data.

Lawmakers from both parties said the growing ownership of professional landlords was causing concern.

“It’s been coming out repeatedly from eyewitnesses, and my colleagues have noted an increasing percentage of single-family homes, especially those owned by private investors. Senator Pat Toomey (R, Pennsylvania) said at a hearing on Tuesday.

Senator Catherine Cortez Masto (D-Nevada) countered Toomey by saying, “I am also concerned about institutional investors and the impact this is having on Nevada. Why are all these properties being bought?” Are you watching what is being done?”

“I know that in my state in 2021, 29% of homes purchased in the Las Vegas metropolitan area will be purchased by investors. I think it has something to do with what we’ve heard before about too many LLCs and not enough transparency,” she continued.

Property prices are rising rapidly across the country in the wake of the coronavirus pandemic, resulting in a shortage of new building projects and doubling the pace of inflation. Case-Shiller’s National Home Price Index rose nearly 20% from May 2021 to May 2022, while the Consumer Price Index rose 8.6% over the same period.

Home prices will rise about 20% from 2020 to 2021, and rents will rise about 12%, according to a joint report on the state of national housing from the Harvard Graduate School of Design and the Kennedy School of Government.

Legal mechanisms like LLCs that favor professional property owners are under scrutiny as families are being devalued from the market by investors.

“There is a theme of suburban investors hiding behind the cloak of anonymity,” Laura Brunner, manager of a government-backed Cincinnati real estate development firm, told the Senate Banking Committee on Tuesday.

“Last summer, we asked the city of Cincinnati to name the five worst landlords.” , which required months of in-depth research, and the large amount of LLCs in use made tracking the acquisition a daunting task.”

Similar legal names like LLC and S Corporation were originally used to encourage entrepreneurship so people could undertake risky business ventures without fear of personal bankruptcy. I made it. Today, LLCs are often used by wealthy property owners as a way to maintain anonymity, according to real estate industry experts.

“I represent the richest and most famous people in the world and I never buy property unless it is in the name of an LLC, sometimes multiple LLCs.” New York Real Estate Attorney Adam Reitman Bailey said in an interview that the anonymity makes it impossible to know who is buying the property.

“Bad methods allow people from different countries to buy property in another country or buy property in America. You can do it with and people won’t know who they are.”

Bailey said the practice is common in high-profile cities like New York.

“As a real estate attorney, New York is a phenomenal place. You can use it as a box and simply buy it in New York cash under the LLC and only the lawyers and clients know who owns the LLC they hide the money that way Real estate moves very slowly and nobody asks questions,” he said.

In recent weeks, the question of housing has been a central topic of hearings in both houses of Congress.

The Senate Finance Committee held a hearing in July to talk about the role tax incentives can play in building more affordable housing. The House Ways and Means Committee recently held a hearing titled “Homelessness: Benefits, Falling Investments, and Americans.” housing crisis. ”

The Treasury Department last week announced new rules to fund more affordable mortgages through the American Rescue Plan, and the White House announced on Tuesday that it would strengthen emergency rental assistance and work toward long-term eviction reform. held a virtual summit on

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