Rental Licensing is Fiscally Desirable to Communities

As Bellingham ponders licensing and inspection of rental properties, the City Council and the Mayor ought to consider the longer term, fiscal ramifications of such a program.

College Station, Texas, home to Texas A&M University, is considering licensing of rental properties. (Click here, here and here to read about these efforts) My contact provided me with information from a certified public accountant in that city who spent 22 years auditing tax returns for small businesses. He concludes that the "operation of rental properties on established, single family neighborhoods [is] a transfer of wealth from owner/occupant to investor/landlord." He opines that over the long run, incursion of or conversion to rental properties leads to decreased property values. Poor property maintenance degrades curb appeal of these properties and one can only wonder about the condition of the rental inside when the outside is not cared for.

There is a decrease in asset value that erodes the tax base for the local jurisdictions. There is a concomitant loss of quality of life for the nearby homeowners due to noise, additional traffic, and an unstable resident population. The tenants can also suffer from poor rental conditions that are hazardous to their health or downright dangerous. Even the landlord can lose at sale time as the value of his asset is equally degraded by surrounding rentals that are not kept in good condition.

He goes on to say, "But the biggest loss of property value is suffered by the owner/occupant in the neighborhood. Due to the federal tax treatment of the owner's personal property, he suffers a double whammy. Any losses by the owner/occupant due to the decrease in the value is not allowed, as a tax loss at any time (usually at the time of sale). On the other hand, the investor/landlord, while generally realizing a positive cash flow covering out of pocket expenses, can additionally deduct for tax purposes all depreciation, interest, taxes, insurance, management fees, etc. etc. This invariably allows a tax loss from the rental properties that can offset other taxable income from wages or passive income up to the losses plus $25,000. The result to the investor'/landlord is a cash savings in federal taxes year after year regardless of any general decline in asset value."


He continues, "The result of the rental activity in the established neighborhood is a general decline or reduction of asset value in the absence of any real estate boom. The owner/occupant suffers a general uncompensated loss in asset value while an investor/landlord realizes a decrease in taxes paid year after year resulting in a transfer of wealth. Since it is outside our ability to correct the inequity of the federal tax code, in the interest of all concerned, the value of property should be protected by whatever means possible."

Given the tax treatment of rentals, any argument that rental properties are not a business becomes ludicrous. All businesses in Bellingham are licensed with the exception of rental properties. Even landlord associations refer to themselves as the "rental industry." It is time to license this industry and to inspect its units for the health and safety of the renters and to ensure that the rental stock does not degrade property values and erode the tax base.