Solutions

Part 12 of... "6 Tax Breaks Landlords Get that Hurt the Economy and You"

Jun 22, 2021

For single-family houses and condos;

Get rid of the depreciation tax deduction, at least on all future house purchases.
Get rid of the 1031 Exchange tax deferral, at least on all future purchases and immediately stop all 1031 Exchanges into single-family houses and condos.
Get rid of the mortgage interest tax deduction, at least on all future landlord mortgages.
Tax profits when profits are taken not when the house is sold.
Tax landlord profits as ordinary income.
Get rid of the stepped-up tax basis on houses that weren’t the grantor’s primary residence.

And, of course, landlords get other tax breaks and those should also be removed to stop distorting the market for single-family houses and condos.

“BUT RENTS WILL INCREASE!”

Don’t worry, removing landlord tax breaks will not increase rents on single-family houses and condos despite what the single-family rental industry screams.

Let’s say there are 2 absolutely identical rental houses next door to each other. One is owned by a landlord who has a large mortgage on the house and the other is owned by a landlord who owns the house free and clear.

Can the landlord who has more expenses – the one with the large mortgage – charge more rent than the rent charged on the identical house next door? No. Having more expenses – whether mortgage, tax, or whatever – doesn’t let landlords charge higher rent.

Getting rid of landlord tax breaks doesn’t mean landlords will charge more rent, it means landlords will eventually own fewer houses… and that means home ownership will eventually increase.

Home ownership will naturally increase when landlords stop getting subsidies that live-in owners don’t get.

Example. Remember interest rates fell a ton in 2019 and 2020 which also reduced landlord mortgage expenses a ton. Did rents fall with landlord mortgage payments? No. In fact, landlords raised their rents incredibly sharply in 2021 despite their much lower interest expenses.

“But Supply Will Fall!”

Yes, when a landlord-owned house is sold to a live-in owner the supply of single-family houses to rent falls by one house, and that lower supply will, theoretically, put upward pressure on rents.

But at the same time, the demand for rentals will also fall by one family, and that lower demand will put downward pressure on rents. The new live-in owner is out of the rental market, most likely permanently.

The balance between supply and demand remains the same. Rents don’t increase.

When a single-family rental house is sold to a live-in owner, it’s true that the supply of rental houses falls by one house but it’s also true that the demand for rental houses also falls by one.

And So It Begins

“New Zealand will axe a tax benefit to property investors as it seeks to stop out-of-control house price growth across the nation that has pushed up values almost 25 per cent in Auckland alone over the past 12 months… it will axe the ability of property investors to claim mortgage interest as a tax deduction”, The Sydney Morning Herald, March 23, 2021.

Earlier, New Zealand had changed its tax laws so tax losses on landlord-owned rental houses couldn’t be used anymore to lower the taxes due on other income. They called this “ring fencing.”

From then on, tax losses from rental houses could only be used to offset taxable income from other rental houses. The tax losses from your rental houses couldn’t be used to lower your taxes on your wage and salary income.

That sounds fair.