A Home Owner’s Nightmare

Oregon is one of the few states in the entire country where you might be better off renting than owning a home. I did a LOT of research into moving up there at one time, mostly due to the fact that Oregon has a much, much friendlier business climate than California does. The taxes are a lot less there for corporations, and there is less paperwork, regulations, red tape and general headaches than you will find to the South.

Here is the flipside though… Property taxes in Oregon are insane. Compared to California, owning property in Oregon is just way too expensive. In my case, I have a 3 bedroom, 2 ba, 1 garage home. It’s about 2,000 Sq feet on a 1/8 acre lot in a semi-decent neighborhood. I pay around $800 per year in property taxes to my County. Total. If I had the same, exact house in a neighborhood of similar value in the state of Oregon, my taxes would be closer to $2,000 per month. While my property taxes are capped at a maximum 1% of the property’s assessed value (which is FAR less than its actual value), property taxes in Oregon vary from 6.5% to 10% per year, and they generally assess property values closer to their actual values. Thanks to California’s Proposition 13, homeowners are actually rewarded for the amount of time that they continue living in the same house, and these tax benefits can be handed down to their surviving children after death. This feature alone can save California homeowners thousands of dollars each year in taxes, and is the only thing that makes owning a home in the state possible for many people.

So, property taxes can literally be 10x as high in Oregon as they are in California for the same type home on the same amount of land in a similar neighborhood. What this really means to your bottom line is the fact that when you go to take out a mortgage, you will also need to finance your taxes, since most people will not have the cash flow to pay that much every year in property taxes. Most homeowners will end up not only paying interest on the value of the property over 30 years, but interest on PROPERTY TAXES over 30 years as well! Financing the property taxes alone can add hundreds of thousands of dollars in interest to the cost of your home over 20-30 years. After the 30 years is up, you are are probably going to have to take out another mortgage just to keep up with the property taxes alone. Most people will never, ever own their own home in Oregon, outright, even after paying a mortgage for 30 years and retiring. I’m guessing that few retirement plans would cover $2,000 per month in property taxes. For what Oregon charges in property taxes each month on a modest home, I could rent 1-2 apartments in California tax-free and get a RENTERS TAX CREDIT!

A Short History of Property Taxes

Believe it or not, such high property taxes were actually common during the first 100 years that the United States existed. Of course, that was before the imposition of personal income taxes, sales taxes (none still in Oregon), fees for all types of “licensing and permits” (building, driving, camping, fishing, etc.) and the numerous other taxes that most cities, counties, states and the feds levy on us (junk food tax, utility tax, tobacco tax, luxury tax, death tax). The one (and perhaps, only) thing that made such high property taxes acceptable to early Americans was the fact that only those who owned land were allowed to vote on how their tax money was spent. If you didn’t own property, you had no vote or say in government. While the fairness of this might be debatable, the fact that Oregon is collecting just as much in taxes as states did 100 years ago while giving land owners LESS rights than they used to have (and making them pay a bunch of other taxes on top of their property taxes) is just crazy. As terrible a place as California is to run a business, at least I can still afford to own a home here. I could never afford to own a home in Oregon, unless I planned on working a full-time job right up until the day I died.

Insult To Injury - More Oregon Taxes - Income Tax

According to the website BankRate.Com, Oregon charges the following income tax rates on all who live there:

Oregon collects state income taxes using a progressive, three-bracket system.

For single taxpayers and married couples filing separate returns:
– 5 percent on the first $2,850 of taxable income.
– 7 percent on taxable income between $2,851 and $7,150.
– 9 percent on taxable income of $7,151 and above.

– End of info from BankRate.Com

No wonder Oregon doesn’t need to charge sales taxes! Exactly what is “progressive” about this tax system? People living far below the poverty line pay just as much in taxes as a percentage as someone making a billion dollars per year. If you are one of those “rich” people who earns more than $7,151 a year, you will have to pay a whopping 9% personal income tax on top of the outrageously high property taxes you are expected to pay. Of course, this does not include things like unemployment tax, Social Security, Federal Income Tax, tax on gasoline and various other imports, permits, licenses, etc. With the State of Oregon being so politically liberal (and I believe that “progressive” is just the new 21st century buzzword that is being used to replace the word “liberal”), one really has to wonder how they justify taxing people ANYTHING that make less than $2,850 a year, let alone 5%. The federal tax system is much, much more equitable when it comes to “progressive” tax reform, which isn’t saying much. Note to Oregon: $2,850 per year is not enough money in your state to buy enough food to keep from starving to death! Why are you taxing these people? They are, by definition, homeless to begin with.

As far as I can tell, the only group getting a real tax break in the State of Oregon are corporations, which pay far less in taxes than the average Oregon resident. Of course, unlike private property owners, corporations can write-off 100% of their property taxes, filing fees, rent, utilities and most other business expenses. Homeowners can only write-off the interest portion of their property taxes, and that is only if they do all of the extra paperwork associated with itemized deductions. Corporations can deduct the PRINCIPAL, as well as any interest and taxes.

How To Avoid (NOT Evade!) State Property Taxes

If you insist on living in the State of Oregon, here is a tax strategy that you may want to consider using… Keep in mind, I am NOT a “tax advisor”, nor an expert on the subject. Run this idea by your own tax consultant before making any financial decisions. Don’t blame me if you frack up your own finances as a result of taking any advice you read here!

Rather than owning a home in your own name, I would highly recommend placing property ownership in the form of a corporation. The corporation itself could be owned by a revocable living trust, rather than by an individual or couple. You will need some legitimate home-based business that you can use to justify the expense, but this should save you enough money to turn your part-time hobby into a real business, anyway.

The first step would be to set up a revocable living trust. This makes a lot of sense for couples with children, as it will help them to avoid probate and taxes after you die. It also affords you a certain amount of privacy and a small amount of security from creditors in the event of a lawsuit. Go to a good attorney. You should be able to have one written for you with everything you need for $2-$3,000 in most cases. You can use your trust for many other things than this particular project. There are many advantages, little paperwork and no yearly fees to maintain the trust. It’s a very worthwhile project.

Once your revocable trust is set up, you need to start up a corporation, preferably in the State of Oregon. In most states, you can incorporate for a few hundred dollars at most. Again, you will probably want to consult a tax professional and attorney that specializes in forming corporations before you start. They aren’t as expensive as you would think, considering the amount of money that they will eventually save you in taxes. A good CPA and legal advisor will ALWAYS pay for themselves in the end.

When registering your corporation, you will need a CEO, President and perhaps some other corporate officers. You and/or your spouse should be fine. The most flexible type is called a “C Corporation”, although there are many other types that you can start as well. Even LLC’s, or Limited Liability Companies, can be used for the same purpose here. Your CPA and/or legal advisor can pick the best legal entity for you. Who owns the corporation? Shareholders ALWAYS own a corporation. In this case, you should put 100% of your new corporation’s shares in the name of the revocable trust that you just started. As “Trustee” of the trust, you have absolute control over all financial decisions made on its behalf, which means that you effectively control ownership of 100% of the stock of the corporation. With 100% ownership, you can “vote” on who to elect to the Board of Directors. If you put family members or friends on the Board of Directors, you have the ability to reimburse them for “business expenses” and travel and write-off all of those expenses tax-free. If your kids live away, have your board meetings at home each Christmas and all of their travel expenses and lodging are tax deductible. Buy them a Christmas present, and it is often tax deductible as an advertising expense or “corporate gift”. Christmas dinner? It can fit into the category of Deminimis meal or petty cash allowance, which is 100% tax deductible, as long as it is served during your board meeting. There are so many tax advantages to owning a corporation, it isn’t even funny. Entire books have been written on the subject though, so I can’t list an extensive number of them here.

Next step, measure your house… Exactly how much of the house can you justify as being used by the business? remember, a business needs a bathroom. A business might even need a garage. It certainly requires a room dedicated as an office, and perhaps the hallway leading up to it (otherwise, how would anyone get there?). For the sake of argument, let’s just say that 51% of the house could be justified as being actively used for business purposes.

Rent To Yourself

Here is where the irony starts to come in. Yes, you still live in the house. You are devoting 51% of it to business activity. The income tax collectors will not just let you “give” the other 49% away to yourself though. You (personally) will have to pay rent to the corporation, based upon fair market value. The irony here is, all of the money you pay in “rent” to the corporation goes straight from the corporation’s checking account to the bank that holds the mortgage. The corporation does NOT make a profit from renting out just 49% of the house, so there is no “income” for it to be taxed on at the end of the year. 100% of the money that the corporation pays the bank (both interest and principal) is a legitimate business expense, and can be written off. To add irony to irony, you personally can now file for a renter’s credit on your tax return, since you are paying rent to the corporation, which is owned by the trust!

In this scenario, the revocable trust really has no income, so it should not need to pay any taxes. Excluding other business activity, the entire home ownership scenario actually goes down as a tax LOSS
for the corporation, meaning that (excluding other business activity) it might only have to pay $25 a year in taxes to the state, and nothing to the IRS.

Other Benefits

There are enough other benefits of corporate ownership to fill many, many books. Try finding a lawyer who does not run his practice as a corporation. You won’t (unless they are REALLY dumb). Owning a corporation can make you effectively “lawsuit proof” in many respects. If all of “your” assets belong to the corporation you created, you can not lose those assets in a personal lawsuit. That is why most Doctors do business as “Dr. So-and-So, A Medical Corporation”. This way, they can’t PERSONALLY be sued for malpractice. Patients can only sue the corporation that runs the medical practice, which usually has very few assets to target. The bottom line is, with enough tax “avoidance” (which is NOT illegal!!!) you can get away with paying almost no taxes at all.

The Catch?

Is there a catch? Sort of. It’s not a “legal” gotcha, it’s more of a practical one. Lawyers and CPAs cost money. Although they will often pay for themselves, you come out far, far ahead if you can create your own trust and will without an attorney (it is absolutely legal to do, and can be just as effective), set up the corporation yourself and manage your own books and tax returns. Another irony here is that corporations are much, much less likely to be audited than private individuals are. Take that for what it’s worth. In any event, none of these things are “easy” to do. I would highly advise having lawyers and CPAs advise you if you have not done anything like this before. Once you learn enough about accounting though, you should be able to get away with using software such as TurboTax for Business in order to file your annual tax returns. In the end, you will learn a lot and save a lot more on taxes.

This same strategy can be used in many other states. Some (like California) charge a LOT more in taxes to corporations, which might end-up making the whole idea infeasible. Literally every state in the country (with the sole exception of New York) has lower taxes than California though, so it is definitely worth checking out if you live in a state with high property taxes, such as Oregon.