Imputed rent

Suppose you own a house worth $240,000, but your job forces you to move to Chicago for two years where you will have to pay $12,000 ($1,000/month) to rent another house with nearly identical characteristics. Fortunately, you can rent out your house for $12,000, but this won’t completely cover your cost of housing because you will have to pay 25% income tax on the rent you earn ($3,000), so your gross housing bill goes up just because you are paying rent for the same kind of housing. As it turns out, your landlord is Jane who happens to have also relocated to your town and is renting your house and paying you $12,000. Legally, she also has to pay $3,000 income tax on the rent you are paying her, but if you can both just quietly agree to trade houses without any money being exchanged, you can both avoid paying these taxes.

Similarly, everyone who owns a home is getting an annual stream of economic benefit (an income) from owning the home whether they rent out the home or whether they live in it. If they rent it out, they get rent payments, and if they live in it themselves, then they are earning “imputed rent”. Imputed rent is the rental value that an owner would get from renting the home they occupy at market rates. A few countries including Iceland, Luxembourg, the Netherlands, Slovenia, and Switzerland do tax imputed rent, and where it is not taxed (like in the US) it is the biggest subsidy for home ownership. For example, suppose you were renting for $12,000 ($1,000/month), but you were earning $1,000/month on $240,000 in savings. If you use your savings to buy the house for $240,000, you would still be getting the same amount of earnings from your savings, but your taxes would drop under the American system. It isn’t fair to tax people more simply because they have invested their savings in stocks or bonds rather than in housing.

In addition, there are more tax breaks for homeowners like the mortgage-interest tax break that increase the government subsidy for home ownership. The mortgage-interest tax break would make sense in the above nations where imputed rent is taxed because it would be just like any other business expense, but in the US, it is just an extra subsidy on top of the tax savings from avoiding taxes on imputed rent. Below is a graph from the Urban Institute via VOX that shows how much the OTHER kinds of subsidies benefit owner-occupied households in different income classes, but with interest rates so low right now, the tax savings of untaxed imputed rent is probably much bigger than the more explicit subsidies in the graph below at least for families above the median income.

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Posted in Medianism

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