November 7, 2012
CBO: Taxation of Owner-Occupied and Rental Housing
This paper illustrates how the different tax treatments of owner-occupied and rented houses affect the relative costs of owning and renting. In the examples, a representative landlord computes the rental rate (the ratio of the rent to the value of the house) required to break even on an investment in a house. Potential homeowners compare that market rental rate as a tenant with an implicit rental rate that reflects the cost of owning a home.
The tax advantages tend to make owning more advantageous than renting for higher-income households, but lower-income households can find renting cheaper than owning. The paper also illustrates how limiting or eliminating certain tax advantages would change the cost of owning relative to renting. While the precise comparisons are specific to the conditions detailed in the examples, their general implications are broadly applicable.
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This paper is valiant but futile attempt to quantify the economic effects of changes to the taxation of homeowners. The effects of the simplifying assumptions are unknown but probably large. Crucially, all dynamic (feedback) effects are ignored.
The price of real estate will change dramatically if taxation of homeowners changes. Buying decisions will change. Borrowing decisions will change. Rental property investment decisions will change. These changes will overwhelm the tiny effects calculated in the paper under static assumptions.
In summary, the paper is an interesting intellectual exercise which policymakers should ignore until someone can credibly model the dynamic effects or at least bound them.
Posted by: AMTbuff | Nov 7, 2012 3:31:09 PM