Luxury Home Price and Taxes

Luxury home marketing is global. When you are trying to communicate to a group that represents less than 1% of the population of the United States or the earth, you are aiming at a very small target group. It is for this reason that there are numerous luxury home marketing vehicles that make sense for brokerages to affiliate with.

I am not exactly sure how it works out but somehow Christie's, Sotheby's, Luxury Real Estate, and Coldwell Banker Previews always find a way to send a magazine to my home. In truth, I really enjoy getting them. For the most part, I am familiar with the firms marketing homes through these channels, I often know the principals and sometimes I may know the agent. In some small way, it is like flipping through a high school yearbook.

This week, I returned from Inman Real Estate Connect in San Francisco to find the Howard Hanna Homes of Distinction. As a Californian, I am always amazed how much house you get for the money in the states they serve like Pennsylvania, upstate New York, Michigan, Virginia, Ohio, West Virginia, North Carolina, and Maryland. For example, you can live in a stunning home in Michigan with 11 acres, 1000 feet of Lake Michigan lakefront, 12,000 feet of living area for $4.3M. A similar property on Lake Erie is priced at $3.9M.

Here is the part I don't get. What are the taxes?

You see, in California, we have Proposition 9, which pins our taxes to 1% of the home price per year. Taxes in Michigan and Ohio are much higher, but I have no clue how high. When you look at home prices in Florida, they have different tax rates for residents and non-residents. For luxury homes, a significant cost of the property is taxes.

I have heard pundits talk about this issue. For example, they say that the buyer usually pays cash. This is true, but they only use cash during the transaction. After the transaction is complete, they structure financing for the property. It is rare for a wealthy person to keep cash in real estate. It is one of the few assets that you can control 20% of the equity, finance the balance, and gain 100% of the return. If you are going to put cash into property, you typically bank in vacant land – ideally a ranch property in a tax free state like Wyoming.

Others have said that if you care about the cost of the taxes, you cannot afford the house. That is rubbish. Taxes are taxes. They add little value to the property. They are a vacated expense for most.

As a reader of these publications, I would like to see the tax rate. It puts the cost of ownership in my head.