By now, you’ve probably heard your contractors or investment club colleagues buzzing about Senate Bill 9. While most of the news focuses on how the new Cook County taxes will affect individual homeowners, we really do need to consider how it will impinge upon our investment activities. After all, buying and rehabbing houses is our bottom-line. To clear up some of the rumors and speculation surrounding this issue, let’s take a brief look at the impact of Illinois Senate Bill 9 actually does and the potential consequences for investors.
Long a point of contention, Illinois’ Senate Bill 9 was designed to close the budget gap and potentially pass the state’s first complete budget in two years. Its public unpopularity stems from a 32% increase in the personal income tax rate, as well as hikes in franchise taxes. The bill also calls for new taxes on services ranging from dry cleaning, cable TV, manicures, tattoos, and home repairs. All home maintenance, including repairing, cleaning, painting, and other services, will be taxed at a rate of 6.25%, according to this bill. Now, this may not seem like a big deal to most people, especially in light of other hot-ticket budget topics like Medicaid and schools, but for real estate investors, it could translate into a significant cost increase.
How Could the Bill Affect Investors?
Senate Bill 9’s potential effects on real estate investors are multifold. For starters, it will obviously increase the cost of doing business. Unlike individual homeowners, our business is buying, rehabbing, and selling houses and as such, we rely upon the services provided by a wide range of contractors. Some of these previously-untaxed services will now carry a higher price tag. This may, in turn, cause some investors to make more frugal decisions when improving a property.
In addition, the bill may cause confusion between investors and their repair service contractors. The new taxes appear to apply only to home repairs, not remodeling or renovation. But the bill fails to articulate precisely how these services differ. Since it is often difficult to know what activities fall under “repair” and which are actually “renovation,” contractors many unwittingly over- or under-charge taxes on their services. This, in turn, is likely to increase the price disparity among contractors according to how they define their services.
Finally, the new bill may serve as a disincentive for people who are considering the purchase of a home in Chicago. A recent poll by Paul Simon Public Policy Institute found that almost half of all Illinois residents would prefer to leave the state, and taxes were the single biggest reason fueling that desire.
The Home Builders Association of Illinois Vice President Bill Ward says that Senate Bill 9’s tax increases will have the hardest hit on seniors, the working poor, and middle-class homeowners. And this comes at a time that they already pay some of the highest property taxes in the country. An increase in homeownership costs through higher taxes is likely to just add fuel to the fire for those who already have the desire to leave. It may further discourage a move for those who are considering a move from another state to Illinois. In short, this legislation may spur a decrease in the number of potential buyers for our investments.
Taking the Long View
If all this sounds discouraging, don’t let it get you down just yet. Senate Bill 9 still has to pass through the House, where it will face even more political challenges. Regardless of how this turns out, you should keep an eye on exactly what each rehab project costs to get the best possible returns for your business. As a HomeVestors® franchisee, I use the proprietary ValueChek™ software to help create regionally-specific cost estimates for every investment opportunity that I consider. That way, I can more confidently sort out whether the house can provide enough repaired value—in any market condition—to make the investment worth my time and money. If you feel uncertain about investing in real estate amidst rising costs, give HomeVestors® a call to find out more.
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Photo Credit: Flickr CC user Elvert Barnes.