Solution #1 - One Tax Code for Single-Family Homes and Condos – Eliminate All Landlord-Only Tax Breaks

By Far the Easiest, Cheapest and Most Effective Solution

This is the easiest and most effective (partial) solution because it’s simple, it stabilizes house prices on both the way up and on the way down, and it’s easy to administer after it’s implemented. 

The tax system distorts the free market for single-family homes. This is the elephant in the room that no one talks about but landlord tax breaks obviously lower home ownership. 

With this common-sense solution that’s hiding in plain sight, we don’t have to add anything, we simply remove all tax breaks on income-producing single-family houses and condos purchased after a given date. Then we phase out over years or decades the landlord tax breaks on those rentals bought before the cutoff date. 

Stop incentivizing speculation! Speculation creates an economic imbalance. It’s just good economic hygiene to not have tax policies that lower home ownership, if you want more home ownership. End those landlords-only subsidies and let the free market work.

Why should the landlord next door get more tax breaks than you do? The landlord gets the same tax breaks you do on the house the landlord owns and lives in but – in addition – the landlord gets a zillion tax breaks on ALL their rental properties, too. See Secret #59.

If primary-home owners of single-family homes and condos don’t get the tax break on the home they live in, no one should get it. 

Without the landlord tax breaks, landlords will still buy single-family houses but they will buy fewer houses and the U.S. home ownership rate will go up… without the government spending any money. 

Free! This solution would be free. It would actually bring in more tax revenue from future single-family home and condo investors. 

The Transition is the Hardest Part. We could start by saying all single-family and condo home purchases completed after a cutoff date will receive zero landlord tax breaks.

The purpose of getting rid of landlord tax breaks is to increase home ownership, increase economic growth, reduce economic inequality, and help stabilize and increase family wealth creation.

After the transition, the benefits will flow easily and permanently.

Easing the Transition? Perhaps rentals purchased before the cutoff date can keep the tax breaks until they sell – if owned by natural persons. (Tax breaks for rentals owned by business entities would need to be phased out because a business entity (like an LLC) that owns a house can be sold but the house itself isn’t sold - the house is still owned by the same business entity even though the business entity has new owners.)

Current landlords will be upset so, perhaps, we could give all current landlords a, new – but temporary – tax break during the transition to ease their minds, at least as long as home prices are not falling. 

For those current landlords who decide they want to pull out of rentals and invest their money elsewhere, perhaps we could temporarily exempt from taxation the first $100,000 of profit (capital gains) per year they make from selling single-family and condos rental houses to live-in, primary-home owners.

Depreciation Deduction. Get rid of the depreciation deduction on imaginary depreciation. Currently, if the house goes up in value $100,000 in a year, landlords still get the depreciation deduction. It’s a pure gift from the government to landlords which lowers single-family home and condo home ownership. 

Mortgage Interest Deduction. In addition, if we removed the mortgage interest deduction on all single-family houses and condos bought after the cutoff date that would not only stop encouraging landlords to displace live-in owners and increase home prices, but it would also stop that tax break for live-in owners from being turned into into higher house prices and causing lower home ownership and higher household debt. (See Secret #34.)

That increased tax revenue from eliminating the mortgage interest deduction on single-family houses and condos could be used to help encourage safer mortgages for first-home buyers. For example, the increased tax revenue could be used to buy down mortgages toward 20-year length, or for Lower-Only Adjustable-Rate Mortgages, or for both, or for other policies for first-home buyers that increase the long-term, sustainable home ownership rate. 

Those first-home buyers would not be getting mortgage interest deductions in the future but they would get the advantages of having safer, sustainable mortgages from the beginning and faster wealth creation. If they got 20-year mortgages, they would build wealth about twice as fast and they would own their homes free-and-clear 10 years earlier. 

Most first-home buyers don’t get the mortgage interest deduction anyway because they don’t itemize their federal taxes. Only about 12% of personal income tax filers itemize their tax returns which is needed for live-in home owners to be able to deduct their mortgage interest payments from their taxes. 

1031 Exchanges. If 1031 Exchanges aren’t completely outlawed, allow landlords when selling single-family homes and condos to use 1031 Exchanges to buy other types of real estate but NOT to buy single-family homes and condos. 

Tax-Free Profit Taking. Getting rid of tax-free profit taking will slow down future booms a lot. The most optimistic buyers will have to pay taxes on their equity withdrawals from cash-out refis. Make cashout refis taxable as capital gains. This is not actually a tax increase because it would reduce the capital gains tax due from the investor when they sell the property by an equivalent amount. It’s just getting rid of a tax deferral strategy.

If That’s Not Enough... If after removing landlord tax breaks, home ownership didn’t increase enough, the federal and state governments could consider increasing taxes on such landlord-owned properties. That would be a complete switch from today where governments provide tax incentives for landlords to buy single-family homes and condos.  

The goal is to increase home ownership that leads to permanent increases in home ownership, not temporary increases in home ownership, like over the last half-century. 

When we focus on increasing free-and-clear home ownership, we're automatically focusing on increasing home ownership over the long term.

Moving to One Tax Code for Homes won't disrupt the space-time continuum. It'll simple increase home ownership and economic growth.

What States Can Do. State and local governments also have a lot of options to increase their home ownership rate with their tax policies. 

States could on future investor purchases of single-family homes and condos:

• Remove the state depreciation (and bonus depreciation) tax deductions 

• Remove the state mortgage interest tax deduction

• Tax capital gains on single-family homes and condos as ordinary income

• Tax cash-out refis as capital gains

• Eliminate 1031 exchange tax break

• Remove the step-up in basis on inherited rental properties

• Make land speculators pay at least the same property tax rate as live-in owners

• And, so on

States or localities could restrict short-term rentals, for example, to properties zoned for commercial use, or the same zoning as hotels and motels.

States could, perhaps, remove the Limited Liability Corporation form of ownership for future purchases of single-family homes and condos. (See section below on LLCs) 

States could make mortgages on such rental properties Full Recourse. (See section below on Full Recourse Mortgages.) 

Again, the goal is to get rid of ALL possible government incentives (taxes, laws, mortgage policies, etc.) to own single-family homes and condos that aren’t incentives for people to own those homes as their primary residences.

If, however, removing landlord tax breaks and other incentives doesn’t increase home ownership enough for what people want in a particular state, they have the option of increasing state landlord taxes on single-family homes and condos purchased in the future.

If people want more home ownership they can introduce disincentives to landlord ownership:

• States could create or increase a sales tax when businesses purchase single-family homes and condos

• Local areas could reduce property taxes on homes owned by natural persons and increase property taxes on properties owned by business entities – would not cover rentals owned by natural persons but would still have a big impact on home ownership.

• Similarly, but more complex and more thorough, local areas could introduce large property tax homestead exemptions for primary-home owners while increasing the basic property tax rate. 

Most politicians prefer to give out tax breaks, not take them away but that won't work here. They'll have to play a little hardball if they want to hit a permanent home run for home ownership in their state. If they want, they could give tax breaks to live-in owners or existing landlords while removing the tax breaks for future landlord purchases of single-family homes and condos. Their changes could be credited for decades in their state for increasing home ownership.