With all the class warfare rhetoric of late, a popular “subsidy” to knock of late is the mortgage interest tax deduction. One of the largest constituents arguing for removal of this tax deduction is of course – renters. See renters often cite the notion that they are in effect subsidizing homeowners by way to the tax deduction they enjoy. Renters pay rent which is a pure expense. Homeowners both build equity through their mortgage principal payments and they also get to deduct the interest portion of their mortgage payments annually (as well as real estate and school taxes). Since renters and homeowners alike are taxpayers, the thinking is that it’s a transfer of wealth from renters to owners. Fair enough – until you dig a little deeper.
- Stability, Community, Intangibles – Many people remain in the same rental unit for years. However, if you knew going in you were going to be staying in the same area for decades, you might be more inclined to buy. One of the oft-cited benefits of renting is the flexibility of mobility – for employment, family, whatever the reason. Homeowners tend to be less mobile given the transaction costs. As such, homeowners tend to contribute more to the local community – they have a vested interest! This is a general statement, not based on anecdotes. Think about it. If you’ve been part of a community for 20 years, you’re probably more involved in the schools, sports, town hall meetings, volunteering, etc. If you move every year or two, is it worth your while to get entrenched in town issues?
- Risk of Loss, Fees -Homeowners face risk of loss when buying a home whereas renters don’t. They pay multiple fees and taxes to buy a home. When I buy and sell a home, I pay a 1% transfer tax each way. This is money that goes into the municipal budget. Shouldn’t homeowners have a tax benefit for the risk of loss they face and the contributions to the community and economy by way of transaction fees and taxes paid? It’s kind of like the lower capital gains rate investors pay compared to W-2 income. It’s meant to encourage at-risk capital investing as opposed to just squandering everything.
- Shadow Stimulus – Homeowners stimulate the heck out of the economy compared to renters. As a renter, you’re not supposed to be hanging stuff on the wall let alone doing upgrades to the home. Over the past few years, I’ve put in a new kitchen, a new patio, new appliances, landscaping and more. Renters don’t invest in the rental property – why would they? And landlords? They do the bare minimum to get by. They’re in business to optimize their profits, not make the renter happy. Take a look at the annual revenues of Home Depot, Lowers and the thousands of small business contractors – It’s well into the tends of Billions of dollars annually. This is a hidden stimulus brought to you by – homeowners. Not renters.
- Renters Pay Lower Effective Tax Rates – This one’s not obvious, let me explain. At first glance, you might say, “Wait, I rent and I don’t have to pay taxes at all. haha.” Well, your landlord pays real estate and school taxes. That is priced into your monthly rent. They’re not paying it for you out of the goodness of their heart. So, you’re paying taxes. However, net-net, in a given area, rental units are generally appraised much lower than a typical single family home for varying reasons (size, multi-unit, age, etc). As such, as a renter, you enjoy the accouterments of everything the local municipality has to offer, but at a lower price.
The homeowners are subsidizing the renters.
In the interest of disclosure, I’m a homeowner. I’m actually somewhat agnostic of the loss of the mortgage interest deduction IF we saw a mass elimination of tax deductions and credits across the board with a new, lower tax rate to offset the loss, as outlined in the deficit panel recommendations that broke recently. If the entire country is seeing some sacrifice universally and the tax code becomes less convoluted, then fine. At the end of the day, I may be out a thousand bucks per year, but it won’t put us in the poor house.
This wasn’t a post about whether you’re better off renting or buying, but rather just trying to point out that the current mortgage interest deduction isn’t necessarily the giveaway the pundits and class warmongers would have you believe. It’s likely the other way around.
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