New York Times: Taxing Homeowners as if They Were Landlords, by Bruce Bartlett:
Continuing my series on tax expenditures, I want to discuss an obscure one: the imputed rent that homeowners get from living in their own homes. ...
The exclusion for imputed rent is ... untaxed
simply because of long practice, not because Congress or the IRS ever said so, although a 1934 Supreme Court case, Helvering v. Independent Life Insurance Co., suggested that a tax on imputed rent might be considered a “direct tax” requiring apportionment. ...
The Department of Commerce’s Bureau of Economic Analysis calculates
imputed rent on an annual basis and includes it in personal income,
which is a major component of the gross domestic product. The data is
typically found in Table 7.12 of the national income and product accounts, which have not yet been updated for 2012. Last year, the B.E.A. calculated
that net imputed rental income was $284 billion for 2011. That includes
depreciation or capital consumption, but does not include an adjustment
for routine maintenance, mortgage interest or property taxes, which
should be deductible.
It’s important to note that this $284 billion figure for imputed rent
represents the bulk of rental income attributed to people in the
aggregate data for personal income. In 2011, total rental income, net of depreciation, was $409 billion, of which $126 billion was received in monetary form. The rest was imputed rent.
The Treasury Department calculates that the tax expenditure for
imputed rent – the revenue that would be raised if it were taxable –
will be $75 billion next year and $437 billion from 2014 to 2018. That
makes it the fourth-largest tax expenditure (see Page 254 in the “Federal Receipts” section of the federal budget). ...
The point of this discussion is not to recommend the taxation of
imputed rent, which Congress is extremely unlikely ever to adopt. It is
to show that the most complicated question in terms of tax reform has
nothing to do with deductions and credits, as is commonly believed, but
rather what is “income.”
For individuals with only wage income, the issue is simple. But as
soon as investments enter the equation, the question becomes more
complicated, and that includes investing in housing by buying a home to
live in. I will have more to say about defining income for tax purposes
in future posts.