As apartment rents climb and home prices soar, more Americans struggle to find stable, affordable housing. While many factors contribute to this growing affordability crisis one often overlooked but considerable, housing cost is property taxation.
After World War II, the American dream was built on the foundation of homeownership. With the GI Bill’s help, returning veterans could purchase homes. Homeownership became a significant source of savings and wealth, enabling families to build equity over time as property values generally appreciated. In effect, homeownership became a form of “forced” savings that Americans could tap for education or retirement.
Some state tax policies encourage homeownership by offering homestead exemptions and lower assessment ratios for primary residences, thereby lowering property tax bills. For example, South Carolina assesses primary residences at 4 percent of their value, compared with 6 percent for other properties.
Ripple Effect of Housing Shortage
The affordability gap has widened dramatically. While the Global Financial Crisis of 2008 initially brought a sharp decline in the costs associated with buying a new home, prices have since risen dramatically, driven by robust demand and limited housing supply.
The shortage of new construction has kept inventory low, making homes more expensive. Costlier new homes, with higher profit margins, customization and premium features, are a better source of profits for home builders than less expensive homes.
The homeownership dream has moved increasingly out of reach. A 2024 Pew Research Center report found 69 percent of Americans expressed deep concern about housing costs, up from 61 percent the previous year.
Nearly one-third of U.S. households are now cost burdened, spending more than 30 percent of their income on housing. Renters are especially affected with nearly half falling into this category. As property values have risen, so have tax bills — often disproportionately affecting low-income homeowners and renters. The way property taxes are assessed aggravates this trend.
The Uniform Standards of Professional Appraisal Practice (USPAP) are the generally accepted standards for appraisal services. These guidelines require an appraiser valuing a property to consider its “highest and best use” of land, which is another way of saying a property’s most profitable potential use. USPAP encourages evaluating cost, sales comparison and income approaches to determine value.
Tax assessors sometimes reject affordable housing as the property’s highest and best use. When viewed through a profitability lens, affordable housing is generally less profitable than market-rate apartments, which can drive up valuations and taxes.
Build-to-rent (BTR) developments, or professionally managed single-family homes, duplexes and similar structures, are a growing trend, but these properties often are assessed at values that can preclude affordable rents.
Developers construct homes specifically for rental purposes, often in suburban areas. According to Pew, developers began construction of more than 92,000 BTR homes in the year ending Sept. 30, 2024 — a 31 percent year-over-year increase. Assessors should examine legally permissible uses, but BTR properties often lack legal rent restrictions. As a result, assessors may value them based on market rents or comparable sales of owner-occupied homes, leading to higher tax bills. Without legal restrictions, these properties are vulnerable to higher values, undermining affordability.
Tools for Reform
Governments have several property tax tools available to improve affordability, including:
Property tax circuit breakers — This policy limits property taxes based on household income. The taxpayer receives relief when taxes exceed a certain percentage of the household’s income.
Deferred tax programs — These programs allow qualifying homeowners, especially elderly individuals on fixed incomes, to postpone property tax payments until the property is sold or transferred.
Special zones and districts — Governments can structure tax abatements in enterprise zones to prioritize affordable housing.
State and local tax credits — These credits can reduce property tax liability based on income and other qualifying factors that can directly ease the financial burden on affordable housing developers and homeowners.
Builder Perks — Providing favorable tax treatment or other incentives to developers who create affordable housing has become popular. For example, many qualifying developers receive federal tax credits that they can sell to offset development costs and make affordable housing projects feasible.
The Low-Income Housing Tax Credit (LIHTC) is the largest federal program for affordable housing. The federal government allocates tax credits to state housing agencies, which distribute the credits to developers who build or renovate affordable housing. Developers typically sell these credits to investors who provide capital to finance construction while reducing their own tax liability.
In exchange for the credits, developers must ensure a portion of their units remain affordable for tenants earning below a certain percentage of the area’s median income for at least 15, but up to 30, years in some states. To support the
LIHTC program, many states require assessors to base tax assessments of LIHTC properties on the income approach, which values properties according to their restricted rental income rather than on the income attainable through market rates, thereby helping affordability.
Some locales have mirrored the LIHTC program by creating private investment funds that provide capital to renovate existing multifamily projects, using deed restrictions to ensure the units remain as affordable housing for a set period. Communities can increase their supply of housing for lower-income residents by addressing the affordable housing shortage with targeted property tax relief policies that attract developers.
Morris Ellison is a partner in the law firm Womble Bond Dickinson, the South Carolina member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at [email protected].