D.C. fixer-uppers become tax ruins

Thousands of tax bills will arrive in the mailboxes of D.C. property owners this week, and some taxpayers no doubt will recoil from the large increases staring them in the face.

The D.C. government doubled the annual property tax rate from 5 percent to 10 percent for unoccupied residential buildings and vacant lots known as “Class 3” properties. The new tax rate will be reflected on the bills, which cover the period from October 2008 through March 2009.

The tax rate isn’t the only big change in D.C. real estate. Housing market conditions have changed drastically since the D.C. Council first considered legislation to address nuisance properties in 2007. Many of the people about to be hit by the new tax rate said it does not make sense when home prices are plunging and credit is hard to obtain.

The D.C. Council passed the Nuisance Properties Abatement Reform and Real Property Classification Amendment Act in October, ostensibly to reduce blight and promote renovation of dangerous, decrepit buildings into marketable real estate. The legislation was signed by Mayor Adrian M. Fenty, a Democrat, whose office declined to comment for this article.

Council member Mary M. Cheh, the Ward 3 Democrat who introduced the nuisance-abatement legislation, worried that “a wide variety of [tax] exemptions” allowed property owners to “game the system and not put their vacant property to productive use.”

“If you don’t hit [property owners] in the pocketbook, they’re not going to respond,” said Kwame Brown, the at-large Democrat who co-sponsored the legislation that doubled the Class 3 tax rate to 10 percent.

But mortgage lenders, investors and people with decades of experience redeveloping buildings and land in the District say the law likely will have the opposite effect. It will lead, they say, to massive foreclosures and uncollected tax revenue. Some say the real estate tax is so high that it amounts to a de facto government “taking” of property without due process.

The 10 percent rate is “confiscatory,” Ed Wilson, who said he has renovated more than 100 properties in the District, told the mayor and the council in a letter. “You are stealing other people’s property, savings and hard work.”

The new tax rate “strikes me as an end run around eminent domain and a grab for tax revenue,” said Tad DeHaven, a budget analyst at the Cato Institute, a Washington think tank. “This isn’t the message you want to send to potential investors in D.C.,” he said. “It sets a bad precedent for a city that desperately needs business investment.”

Beyond the idea of a 100 percent tax increase, Mr. Wilson expressed outrage over its timing.

“In a time when undeveloped land cannot be sold at any price, and when building rates are at 45-year lows, why do we attempt through tax policy to force immediate development? It makes no sense at all - unless the city wants to own all the land,” Mr. Wilson said.

He said he can’t imagine a worse time to assess owners of unoccupied buildings at the Class 3 rate of 10 percent. In this depressed housing market, nobody can get a loan to renovate, and people can’t sell their properties, he said.

“There are no buyers buying fixer-uppers,” Mr. Wilson told The Washington Times. “I know because I have a dozen, at least.”

After the real estate market plunged in the District, experienced lenders, investors and rehabilitators lost properties to foreclosures that never would have occurred during the boom years.

Those losses were precipitated, they say, by the 5 percent Class 3 tax rate in a down market, and they fear that the 10 percent rate will be a catastrophe for both the District and for the people who have used their life savings and hard work to renovate thousands of homes in the nation’s capital.

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