Saturday, February 21, 2009

Are Owner and Renter Housing treated equally under the federal tax code?

UC-Irvine, The MacArthur Foundation and the Rockefeller Foundation sponsored a conference this week on "Housing after the Fall."

The conference featured a number of interesting papers, but one of the most interesting conversations happened in the aftermath of Marge Turner and Denise DiPasquaule's talks on rental housing. They both pleaded for equal treatment of owner and renter housing (as did Stuart Gabriel the day before). But Bill Wheaton and John Weicher made provokative and possibly correct arguments about why the two house tenure are basically treated equally.

The biggest benefit of owner relative to renter housing is that imputed rent is not taxed. But as John points out, those who own their homes with equity are largely the elderly, many of whom have low cash incomes, which means that they have low marginal tax rates a so get small after tax benefits from owning. Both owners and landlords get to deduct interest and property taxes (although owners who pay the AMT cannot deduct property taxes). Landlords can deduct depreciation and maintenance; owners cannot. Landlords are probably in higher tax brackets than renters. Owners are (largely) exempt from capital gains taxes, but so are landlords, who can use like-kind exchanges to defer capital gains taxes forever.

Bill said he did a back of the envelope calculation that shows that the tax code treats the two tenure types about the same. The topic merits further research, but it may mean that those who think owner housing gets treated preferably may be wrong.


Edward said...

Home ownership is subsidized with:
1. Mortgage interest tax deduction
2. Capital gains rollover exclusion (incentive to buy bigger homes or move to more expensive areas)
3. One time capital gains exclusion
4. $8,000 new buyer tax credit

I'm undoubtedly missing others.

Why do we subsidize home ownership to such an extent?

#1 and #2 are perverse tax incentives that encourage elderly couples "moving up" into 3,400 sq ft environmentally destructive homes. (This is exactly what is happening in the new huge homes built behind my 50 year old neighborhood.)

This certainly benefits the builders - but since the tax benefits are funded by the rest of society, does this provide social benefits to the rest of us?

Richard K. Green said...

Edward, read John and Bill's points about the benefits rental housing gets.

Until this weekend, I was sure the points you made were correct. But now I am not so sure--and it is worth an empirical investigation to find out.

Anonymous said...

What's missing from this argument is that the lander is taxed on the rental income (after the deductions mentioned) but the homeowner is not taxed on the imputed rental income from the home.

The real tax break that homeowners get is not the interest deduction, but the fact that the imputed rental income (what the home would rent for) is not taxed.

BB said...

Richard: " John and Bill's points about the benefits rental housing gets."

I'd love to; where can I find them?

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