Keeping Housing Affordable Is Hard Enough. Unfair Taxes Make It Worse.

This article is part of The Rooftop, a blog and multimedia series from New America’s Future of Land and Housing program. Featuring insights from experts across diverse fields, the series is a home for bold ideas to improve housing in the United States and globally.

The American housing market has worsened economic inequality along racial lines for over a century through systematic—and often government-backed—discrimination. And in far too many places, property tax policies are making it worse.

Racial discrimination in the housing market continues today, as Black and Latino mortgage applicants are more likely to be denied a conventional home loan. The white-Black homeownership gap is now 28 points worse than a decade prior. Unsurprisingly, the wealth gap between renters and homeowners in the United States mirrors the wealth gap between Black and Latino Americans and their white counterparts.

As this gap widens, affordable starter homes, which have helped many families gain access to homeownership, are a dying breed. Only 8 percent of new homes built in 2022 were 1,400 square feet or less, and fewer than 15 percent of new home sales in the United States are of homes under $300,000. For many households, buying at that price point is still a stretch, as it requires a household income of at least $108,000 a year—40 percent more than the national median income. If a family is lucky enough to find such a home, programs like down payment assistance can get them in the door—but that same door slams shut for the next family, as the home appreciates in value.

There’s a way to fix this, or at least combat it, through shared-equity housing. In these models, which include community land trusts and limited-equity cooperatives, a homebuyer purchases a home or share of a multifamily building at a below-market rate, while agreeing to dedicate a portion of the home’s appreciation back to the shared-equity entity upon sale, to be used as subsidy for the next homebuyer.

The American community land trust model has its roots in the Civil Rights Movement, as a way for Black Southern farmers to own land amid economic and political uncertainty. Shared equity homeownership models have proven results in opening doors among people of color: In the shared equity market, the proportion of minority homeowners increased from 13 percent between 1985 and 2000 to 43 percent between 2013 and 2018. Nearly all of these homes were affordable to families making less than the median income.

But once again, unfair housing policy threatens to reduce or eliminate Black and Latino families’ access to the American dream of homeownership. By assessing and taxing shared equity homes at the same rate as their traditional-market counterparts, state and local governments’ real estate tax policies are making the wealth gap worse.

Taxation Without Differentiation

In theory, shared equity models keep homes at the same level of affordability in perpetuity, through income-restricted sales based on a percentage of area median income. These models often rely on a one-time initial subsidy, such as donated land or a grant, that enables the homes to be made available at a below-market rate. As the homes appreciate in value over time, the need for subsidy is reduced or eliminated, as a portion of the equity gained from a home’s appreciation helps cover the affordability gap needed for the next homebuyer.

Dwellings in community land trusts, cooperatives, and other shared-equity arrangements are not open-market homes. Yet in many states, they are taxed like they are. This makes property taxes on these homes higher than their full market value, extracting wealth from families that need it the most.

Property tax assessments are based in part upon the values of similar properties on the open market. But this means little if the property will never be sold for its “full market value.” And yet, many stewards of shared-equity programs find themselves pitted against their own local and state governments through assessments that don’t take their resale restrictions into account.

When property taxes, real estate transfer taxes, and other transactional fees devour part or all of the subsidy gap needed to make a home affordable—an amount that can surpass $10,000 per unit in some areas—then the home is no longer affordable to current and subsequent generations.

An Easy, Inexpensive, Apolitical Solution

We at Grounded Solutions Network are working with states and localities, including through the Valuing Homes in Black Communities Challenge, to create more equitable taxation policies that benefit both homeowners and local governments. Many states, including California, Colorado, Florida, Massachusetts, North Carolina, and Texas, have put provisions into law that reduce or eliminate property taxes on community land trust homes, shared-equity units, and homes owned by nonprofit organizations. In Texas, for instance, localities can reduce the property taxes owed on a community land trust home, typically through a regular audit and verification process.

But states that have not instituted this basic tax reform are home to at least 20 million Black Americans—about half of the national Black population. Instituting real estate tax policies that accurately reflect homes’ true values would benefit all homeowners, and especially those traditionally shut out from homeownership.

Assessing shared-equity units at their true value does not threaten the overall tax revenues of state and localities because, for better or worse, there aren’t enough of them to do so: Community land trusts and shared-equity models account for about 44,000 units out of more than 145 million housing units nationwide.

But the value to the owners and stewards of these shared-equity properties adds up. Shared-equity homeowners can spend less of their income on unfairly high property taxes, enabling them to build wealth and provide more for their families. Limited-equity cooperatives can invest more quickly into property maintenance and improvements, lowering repair costs for residents while improving their quality of life. Community land trusts can receive and convey properties without fear of being hit with real estate transfer taxes that treat them the same as a millionaire homebuyer.

The idea of differentiated property tax policy isn’t new: Nonprofit landowners—including private institutions with multibillion-dollar endowments—are often exempt from property taxes. There is already a clear and widely accepted property tax break for institutions that provide a public value that cannot be accurately captured in the market.

This exemption typically ends, however, with housing. In the Nashville neighborhood where I live, for instance, the longstanding nonprofit community organization pays no property taxes on its community center, playground, and adjacent parking. The same organization, however, gets hit with a five-figure property tax bill every year on a five-unit townhome complex it has owned for 30-plus years and rents to families below market rate. These property taxes have in fact threatened the long-term affordability of this housing, a threat averted in recent years in large part thanks to grants provided by the Amazon Housing Equity Fund.

One might ask why local and state governments would give up any tax revenues in uncertain economic times, no matter how small. But that’s the wrong question. The right question is why governments would choose not to invest in incentivizing new forms of homeownership, when such investment leads to greater community stability, a broader and more stable tax base, and increased purchasing power.

If there is agreement on anything in this country when it comes to politics and policy, it’s that housing costs have outpaced income to the point that homeownership is out of reach for millions of Americans. If providing affordable housing doesn’t hit the threshold of “public value” at this point, I’m not sure what does—especially given the costs of health and social services for residents who fall into homelessness, which rise when housing costs increase dramatically.

“If providing affordable housing doesn’t hit the threshold of ‘public value’ at this point, I’m not sure what does.”

Putting equitable taxation policies into place requires state lawmakers to properly define which properties qualify for tax reductions and exemptions, and to give property assessors the tools to identify shared-equity models. Local and state officials will need to work together to ensure properties are assessed accurately, and stewardship organizations like community land trusts may need training from officials to ensure they’ve taken the correct steps to document their eligibility.

The good news is that the roadmap is there, thanks to the work done by a variety of states, localities, and advocates to ensure shared-equity homes are taxed at the appropriate rate relative to their value. If we’re going to create more wealth in this country for all of us, we’re going to have to change the rules.

Editor’s note: The views expressed in the articles on The Rooftop are those of the authors alone and do not necessarily reflect the opinions or policy positions of New America.