Bruce Bartlett has a thoughtful post at the New York Times on the issue of imputed rent. He artfully explains how the rental value of a house is still there, regardless of whether it is owner-occupied or leased – and therefore, a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on collected rent only is a bias.
Unfortunately, this premise leads him to an inelegant conclusion, where owner-occupied housing gets treated similarly to rental property:
In return for paying taxes on imputed rent, it would be perfectly reasonable for homeowners to get depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. and a write-off for reasonable upkeep – painting, repairs and other necessary costs to maintain livability and structural integrity. And, of course, mortgage interest and property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es would remain deductible. New appliances, additions and improvements would be considered investments that would also be depreciable.
This sounds awfully difficult. I certainly wouldn’t want to go through that on my tax return. It becomes especially problematic when you extend the logic even further. Treat houses this way, and cars will follow, and you’ll have taxes on your imputed cab fares and deductions for your oil changes. It’s a mess.
A better idea: instead of forcing taxpayers to deal with all sorts of tomfoolery where they track expenses and depreciation for complicated deductions, why not treat other things like owner-occupied housing? It’s much simpler, and, as I’ve argued before, it’s the right thing to do. The problem with the American tax code is not that owner-occupied housing is treated too well – it’s that everything else is treated too poorly.
The correct way to treat possessions is like this: you pay taxes on your salary and use the after-tax money to buy an asset. From then on, that asset – whether it is a financial asset or a durable good or anything else – is yours. You can sell it or rent it out to other folks. You can depreciate it or improve it or repair it. And none of these things require deductions or credits or new taxes.
Wouldn’t that be much simpler?
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