Question

TrIs assignment is due either on canvas or in class on Thursday, October 31st 1. Explain, briefly, different tax treatment of housing changes the user costs for owner-occupiers, relative to landlords? Everise 1

Answer 1

Note : For answering this question i have taken the relevant paragraph from the US taxation guide on Housing.

Following are the tax treatment of owning the house and renting the house.

Tax Treatment of Owner-Occupied Housing

Net Imputed Rental Income: When a person buys a property maybe a house or a land and then rents it to someone else and the money which the landlord gets from that is then taxed by government. This is called as 'rental income.

Deduction for Mortgage Interest. The deductibility of mortgage interest is considered a tax expenditure only because the tax code does not require that owners include the imputed gross rental value of their home as income. If that imputed rent were included, then mortgage interest would be a legitimate business deduction, just as it is for landlords.

Deduction for Property Tax. Homeowners who itemize are allowed to deduct property taxes levied by state and local governments. As with the deduction for mortgage interest, this deduction would be a legitimate business expense rather than a tax expenditure if owners were required to include their imputed gross rent as income.

Exclusion of Capital Gains on Primary Residence. When people sell an asset for more than the purchase price (the “basis”), they generally realize a capital gain that is subject to taxation as income. Long-term capital gains—those realized on assets held for more than a year—are taxed at various rates, most of which are below the rates applied to other types of income. However, the tax code allows taxpayers to exclude some of the capital gains attributable to owner-occupied housing. The current exclusion is limited to gains from the sale of a primary residence of up to $500,000 for couples filing joint tax returns and $250,000 for most other taxpayers. The exclusion is further restricted to houses that have been primary residences for two of the last five years.

Tax Treatment of Rental Housing

Like other business owners, landlords determine taxable income from rental housing by subtracting expenses from gross receipts. Thus, landlords generally include rents received as income and deduct expenses such as maintenance and operating costs, mortgage interest, and property taxes. In addition, they are allowed a deduction for the depreciation—the loss in value—of the property as it ages and wears out.

Depreciation

For rental housing, the tax code specifies that the initial value of structures can be depreciated by using the “straight-line” method over 27.5 years. Under that method, the annual depreciation deduction is a constant amount equal to the initial value of the structure divided by 27.5 years. As a result of those deductions, the remaining undepreciated value of the structure declines in a straight line to zero after 27.5 years. That value at any one time is referred to as the structure’s adjusted basis, which is used to compute the capital gain when the property is sold.