K. Hovnanian Homes
The Brooks at Freehold, NJ
 

Most people expect a home to be their most significant purchase. So, if one can buy an existing home tax-free under the FAIRtax, why would anyone ever consider buying a newly constructed home where that purchase would be taxable? Should we not encourage the building of new houses to increase the housing stock? This question comes frequently, and there are ways to address it.

You can counter with, “Would you be willing to pay slightly more for a new house if not only local property taxes and mortgage interest were tax deductible, but:

“1) Mortgage principal was tax-deductible,
“2) The down payment on the house was tax-deductible,
“3) The capital gain on the sale was tax-deductible.
- and -
“4) The above applied equally to your wage and self-employment income on which you now pay payroll and self-employment taxes?”

With the FAIRtax, all of these results are true because there is no tax on income or payroll in the first place. Under today’s income tax system, taxpayers can deduct mortgage interest and local property taxes – up to a limit – from their income tax base. However, they cannot deduct any of these items from their payroll or self-employment tax base.

Moreover, mortgage principal, down payment, and capital gain on the house are not deductible from the income tax base. Under FAIRtax, these items are completely untaxed. 

As a matter of social policy, the tax code should not prefer one investment over another to receive favorable tax treatment. The FAIRtax does not prefer personal residential real estate over any other investment.

Consider also these factors:

1) If a builder buys land and a tear-down from a private person, the builder receives a business use conversion credit under the FAIRtax for converting the house and land from private use to business use. The builder can pass this credit on to the customer. So, in effect, the consumer under the FAIRtax pays only for the portion of the house that truly represents new construction. It's no different from improving an existing home.
2) If a builder buys from a business that has owned the land long enough to depreciate it, there should be little difference between today’s income tax and the FAIRtax because tax depreciation has long been wrung out.
3) Under the FAIRtax, the builder pays no embedded tax costs for its labor and materials. The builder saves embedded tax costs relative to today’s income tax.
4) Many people who buy existing homes choose to add to them or improve them. The FAIRtax applies equally to new constructions and home improvement.

With the FAIRtax, new homes are like any other tangible property item. Over time, the market adjusts to the new tax environment.

I would love your suggestions for putting these arguments into a soundbite.
 

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