(Christian mentioned this policy in his question.) It is a factor in housing tax policy, but it is not as important as many think. I have not yet mentioned mortgage interest deductibility, which may surprise some readers. An owner-occupied home generates income that the tax authorities don’t “see,” and this makes it extraordinarily advantageous. And you might be able to get better-than-average tax treatment on stocks by putting them in a retirement account (though this still doesn’t shield you from entity-level taxes.)īut all in all, the general idea is usually the same across the years, people, and even countries. This chart is from 2014, so the precise calculations would be different today as a result of the 2017 Republican tax bill. Christian, for example, was writing to us from Germany, where the CBO’s analysis would certainly not apply. Now, there are a variety of tax regimes and a variety of personal situations you could be in. Some of the costs of that higher tax burden are passed along to the renter. As CBO shows, renter-occupied housing does have a positive tax rate, primarily because the landlord pays tax on the renter income. You can also compare the taxation of a renter-occupied home to an owner-occupied one. So if you’re looking at things from the perspective of capital to spend on either a down payment or a stock portfolio, it is likely that the down payment’s returns will be taxed less. The tax rate on C corporations (the type of business you might buy stock in) is 31 percent overall, after you consider the entity-level taxes paid by the corporation as well as the personal-level taxes paid by many shareholders. It is worth examining how housing stacks up to the alternatives. Owner-occupied housing is close to zero, because the biggest benefit it gives you is completely untaxed. One document from the Congressional Budget Office I’m fond of is a study from 2014 on the effective tax rates on different kinds of investments. The absence of a transaction and the substantial voting power of homeowners makes it unlikely that imputed rent will ever be taxed. But the ongoing stream of benefits is real, regardless of whether you think it would be good to tax it or not.Īnd rest easy: the economists are never going to get their way. You might object, and say this doesn’t count as “income.” You might object even more if I tell you that a lot of economists wish we did tax imputed rent. Alternatively, you can think of it as a rent payment you make to yourself, or the value of not having to pay rent to someone else. This isn’t cash income, but rather, the in-kind value that you get from being able to live in your home. Owner-occupied housing’s tax treatment is better primarily because a particular style of income flies under the radar of most tax systems, known as imputed rent. You avoid some of these costs by becoming your own landlord. The second is that there are inherent and (literally) costly frictions in any business relationship, including and perhaps especially landlord-tenant relationships. Two reasons: the first is that the house is likely to have superior tax treatment. Christian Scholz asks: If your plan as a young person is to maximize your wealth until retirement, what is the better investment strategy: buying a house and therefore saving rent or paying rent but investing your equity in stocks.Īssuming you know what kind of living space you want for the near future, a house is generally the better call.
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