renting vs. buying

I agree with the main premise but, at least in the US, there is a tax policy that generally subsidizes the homeowner. This subsidy is often overstated, but it is there and sometimes significantly moves the equilibrium point.

What tax advantage does the homeowner have that the landlord doesn't have?

Dave

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There is different treatment, but in the end I think it somewhat balances out.

Homeowner: does not report income from imputed rent, can often times deduct most mortgage interest and all property tax, if itemizing deductions. Upon sale can often exclude $250/$500K capital gain from taxes, cannot deduct any loss.

Landlord: does report income, but can also deduct *all* expenses, including insurance, repairs, HOA dues, etc that a homeowner cannot deduct, plus of course 100% of mortgage interest and property tax. Upon sale, has taxable gain (which can be deferred via like-kind exchange)

Depreciation can apply to homeowner (business use of home) and does apply to landlord, but in both cases is "recaptured" upon sale. However the landlord does have added benefit of being able to take losses, including "paper" losses such as depreciation, up to $25K against current income, and to carryover unused losses, which homeowner does not have. Schedule A deductions for homeowner only come into play after AGI is computed, so are not always as valuable.

-Mark Bole

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Property taxes in many communities are less for the homeowner than the landlord as well.

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I think he meant subsidizes the homeowner as compared to the renter, i.e. that the tax policy encourages purchasing. Joe

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To me, tax policy seems pretty neutral regarding renting or purchasing. Perhaps it is a difference in perception, since in the case of renting, the tax breaks go to the landlord, who presumably can rent at a lower price because of them, but in the case of purchasing, the tax breaks go directly to the owner. Although real estate agents make a big deal about the tax breaks of purchasing, I doubt that they are as significant as the agents make them out to be.

Dave

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I'm afraid I, personally, don't see any tax breaks for the home owner. I own my home free and clear. I don't itemize. However, because I have pre-paid rent, I do not have to pay income tax on income I would otherwise need to pay the rent. But I wouldn't call that a tax break. I will, of course, see a break for capital gains when it comes time to sell, although they may change that gains exclusion by then (30 years?).

Elizabeth Richardson

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Another sometimes big deduction is the cost of paying a rental agent and/or property manager to take care of the place and do a lot of the onerous chores that people often mention as a disadvantage of owning rental property.

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Understood. And as many thread here often do, this has splintered into a number of facets of the buy/rent issue. I see your point, and you are right, of course. Many issues are based on the margin, we discuss the marginal tax rate which presumably dictates behavior, e.g. knowing my next dollar of ordinary income is taxed at 28% may or may not impact my investing decisions or decision regarding the next unit of labor I sell.

In the case of deductions (of interest and property tax) for home buyers, the discussion usually centers around the purchase, the new home, $250K, $200K mortgage. $12000 in interest, plus $4000 in property tax. I'd assume (yes, I know) that the couple's income might just put their state tax at a level where they may not itemize, but right on the edge. Therefore, that $16,000 is a schedule A deduction. In the 25% bracket, that's $4,000 or $333/month.

The rent/buy decision would look at this, and other factors and go from there. That $333/mo may or may not be a big deal to some, but those on the edge may be able to buy once that's taken into account. In theory, congress taxes what they wish to curtail and offers deductions for what they wish to encourage.

Joe

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If you did itemize, you'd get to deduct your property taxes. You must have a low income, no or low state income taxes, and/or very low property taxes.

In many towns around bigger cities, property taxes on a median home are high enough to put a single filer above the standard deduction (ie. worth itemizing even without any other deductions).

Of course, if one has, say, $6000 of deductible items, at the margin, one is only getting a tax benefit on that last $650 because of not using the std deduction. (ie. it's not a completely trivial calculation to figure out how much deductibility is really worth and it depends in a whole variety of ways on one's tax filing status).

I am not foolish enough to be leaving money on the table. I don't itemize because I don't have enough deductions to get to $10,700. No state income taxes and some of us choose not to live in more house than is necessary, so property taxes are very reasonable.

My reason for commenting on this thread is to point out that renting goes on and on, but there can be an end to mortgage payments. While Mark pointed out there is a difference between cash flow and expense, part of the equation of home ownership is just that: with time and careful planning you finally own your home, rather than sharing ownership with the bank. At that time you start living off your investment. No, this shelter isn't free; there are both property taxes and maintenance costs. But it sure beats rent! (And don't even start on me about lost opportunity cost.)

Elizabeth Richardson

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At least in Texas, the property taxes are billed in October and payable anytime up to January 31 without penalty. This lets you choose what tax year in which to pay them.

Pay them in January and December of one year and itemize. Pay no property taxes the next year and take a standard deduction. This reduces the problem you discuss.

-- Doug

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