Examples of Layer 3 Tax
This article will give examples of the Layer 3 Tax from our housing affordability article.
Note: GAR (General Appreciation Rate) = Inflation (~1.0 points) + 1.5 points = 2.5%
Example 1:
Johnny Flipper purchased a house 1 year ago for $100,000 and he wishes to sell it this year (2019) after he has fixed it up. Let’s see how much he could sell it for without incurring the Layer 3 Tax. He spent $50,000 to renovate the home, so we will add that into the equation also. The $50k also includes the labor and profits from renovation (in other words, $50k represents how much Johnny Flipper would charge a random person to do the same amount of work on their house).
Appreciation =
($100,000 + $50,000) * 2.5% appreciation * 1 year = $3,750.00
Total Value with GAR= $100,000 + $50,000 + $3,750.00 = $153,750.00
Now we will add the bonus points:
Bonus Points = 2% * 1 year of residency= 2%
Bonus Amount = $153,750.00 * 2% = $3075.0
Total Amount Residence can be sold before incurring any Layer 3 tax: $153,750.00 + $3075.0 = $156,825.00
So the seller can sell for $156,825.00 and not incur any Layer 3 taxes. Let’s see how much L3 taxes would be incurred in different purchase scenarios.
Scenario 1: A buyer wants to pay $165k for the house.
Since the buyer’s price is above the allowed price we will charge the Layer 3 tax.
First let’s find out how much over the allowed price we are:
$165,000 — $156,825 = $8,175
How many points above the allowed price are we:
$8,175 / $156,825 = 5.2%
So we are 5.2 points above the allowed sale price.
Looking at the table we see that the tax for being 5.2 points above is 5% for both the buyer and seller on the amount above the allowed price:
Buyer pays: $8,175 x 5% = $408.75
Seller pays: $8,175 x 5% = $408.75
The city/county would make $817.50 in L3 taxes.
Scenario 2: A buyer wants to pay $185k for the house.
Since the buyer’s price is above the allowed price we will charge the Layer 3 tax.
First let’s find out how much over the allowed price we are:
$185,000 — $156,825 = $28,175
How many points above the allowed price are we:
$28,175 / $156,825 = 17.9%
So we are 17.9 points above the allowed sale price.
Looking at the table we see that the tax for being 17.9 points above is 17.9% for both the buyer and seller on the amount above the allowed price:
Buyer pays: $28,175 x 17.9% = $5061.88
Seller pays: $28,175 x 17.9% = $5061.88
The city/county would make $10,123.77 in L3 taxes.
Scenario 3: A buyer wants to pay $275k for the house.
First let’s find out how much over the allowed price we are:
$275,000 — $156,825 = $118,175
How many points above the allowed price are we:
$118,175 / $156,825 = 75.3%
So we are 75.3 points above the allowed sale price.
Looking at the table we see that the tax for being 75.3 points above is 75.3% for both the buyer and seller on the amount above the allowed price:
Buyer pays: $118,175 x 75.3% = $89,050.41
Seller pays: $118,175 x 75.3% = $89,050.41
The city/county would make $178,100.82 in L3 taxes from this sale.
Scenario 4: A buyer wants to pay $150k for the house.
Since this amount is under the allowed sale price there is no L3 tax applied
Example 2:
Jane purchased her house 40 years ago for $60,000 and she wishes to sell it this year (2019). Let’s see how much she could sell it for without incurring the Layer 3 Tax.
Appreciation = $60,000 * 2.5% appreciation * 40 = $101,103.83
Total Value with GAR= $60,000 + $101,103.83 = $161,103.83
Now we will add the bonus points:
40 years of residence = (2% * 40 years) = 80% = $128,883.06
Total Amount Residence can be sold before incurring any Layer 3 tax: $161,103.83 + $128,883.06 = $289,986.89
So the seller can sell for $289,986.89 and not incur any Layer 3 taxes. Let’s see how much L3 taxes would be incurred different purchase prices.
Scenario 1: A buyer wants to pay $300k for the house.
Since the buyer’s price is above the allowed price we will charge the Layer 3 tax.
First let’s find out how much over the allowed price we are:
$300,000 — $289,986.89 = $10,013.11
How many points above the allowed price are we:
$10,013.11 / $289,986.89 = 3.4%
So we are 3.4 points above the allowed sale price.
Looking at the table we see that the tax for being 3.2 points above is 2% for both the buyer and seller on the amount above the allowed price:
Buyer pays: $10,013.11 x 2% = $200.26
Seller pays: $10,013.11 x 2% = $200.26
The city/county would make $400.52 in L3 taxes.
Scenario 2: A buyer wants to pay $450k for the house.
Since the buyer’s price is above the allowed price we will charge the Layer 3 tax.
First let’s find out how much over the allowed price we are:
$450,000 — $289,986.89 = $160,013.11
How many points above the allowed price are we:
$160,013.11 / $289,986.89 = 55.2%
So we are 55.2 points above the allowed sale price.
Looking at the table we see that the tax for being 55.2 points above is 55.2% for both the buyer and seller on the amount above the allowed price:
Buyer pays: $160,013.11 x 55.2% = $88,327.23
Seller pays: $160,013.11 x 55.2% = $88,327.23
The city/county would make $176,654.47 in L3 taxes.
Scenario 3: A moron with too much money really wants the house and wants to pay $875k for the house!
First let’s find out how much over the allowed price we are:
$875,000 — $289,986.89 = $585,013.11
How many points above the allowed price are we:
$585,013.11 / $289,986.89 = 201.7%
So we are 201.7 points above the allowed sale price!!
Looking at the table we see that the tax for being 201.7 points above is 201.7% for both the buyer and seller on the amount above the allowed price:
Buyer pays: $585,013.11 x 201.7% = $1,180,192.45
Seller pays: $585,013.11 x 201.7% = $1,180,192.45
The city/county would make $2,360,384.90 in L3 taxes from this sale.
I am hoping no one is stupid enough to actually go through with a sale like this and pay this much in taxes, but you never know.
The entire point of the L3 taxes is to create resistance against over-inflated sale prices. That’s why we have a graded tax table that increases resistance the farther away from the allowed price we go.
