# Should rent on your principle residence be tax deductible?



## andrewf (Mar 1, 2010)

When you own your home, you enjoy certain tax advantages, including tax free capital gains, and no tax on the implied rent of the property (what rent you avoided paying by using the house you own). When you rent your home, you do not enjoy any of these tax advantages. You don't get to deduct any of the rent amount from your income. Additionally, the landlord is subject to any capital gains on the property and must pay tax on the net rent income. All this adds up to home ownership getting preferential tax treatment to renting. There are a couple problems with this that I see, but the most important is that it distorts behaviour toward home ownership. In my opinion, it should be tax equivalent for Person A to live in a home they own and Person B to live in a home they own vs. Person A living in Person B's home and vice versa. As it stands, the former receives better tax treatment.

Seems a bit unjust, no?


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## Jungle (Feb 17, 2010)

What I don't like is the tax rate you must pay on rental income. As your mortgage gets paid off, the income becomes rather tax inefficient. Then as you mentioned, when you sell the rental, you are likely to pay capital gains tax on the price appreciation. The only advantage is how else are you going to leverage such a large amount of money? Mortgage=opportunity. 

Things have changed in the last 10 years as real estate has become so expensive in the cities that it's almost impossible for a landlord to buy a place, rent and make positive cash flow and profit. Housing in general is illiquid and transfer/lawyer and realtor fees also eat big slices of profit when selling. 


So to get at the meaning of your thread, I can see a discrepancy in the tax treatments between principal residence and rental. 

Should our principal mortgages be tax deductible? In depth I don't know how to answer that. But you can do the Smith maneuver, which is close. 

The states has the tax deductible mortgage but rumors are saying they are going to take that away, as their trillion dollar debt looms overhead of the stripes and stars.


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## andrewf (Mar 1, 2010)

Primary residence mortgage interest deductibility would make the imbalance in tax treatment worse, not better.


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## kcowan (Jul 1, 2010)

I agree that it is unfair and encourages home ownership. But then our tax system is also unfair. Deferral of capital gains until they are actually realized is a major benefit to the growth investor. The taxes can be deferred indefinitely.

The best we can do is organize our financial affairs to take advantage of the current tax system. The TFSA and HST are steps in the right direction.


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## Rico (Jan 27, 2011)

A few random thoughts about this;

I think one consideration is levels of risk incurred. A landlord risks his property when having renters but also has the benefit of someone else paying for his debt costs while the property (in theory) appreciates. If things work out well, the landlord has an interest free loan, the renter walks away with nothing. I think the landlord should pay tax for this benefit. (note: I am a landlord)

You mention certain tax advantages of home ownership like protection from capital gains. However, there are "walk away" advantages with renting. Also, you state that you are not taxed on the "implied rent" of the owned property. I don't see how this is a tax advantage - one is not taxed for renting so how are you "saving" here?

Things leaning toward home ownership is likely by design. I'm thinking of the structure of the social fabric. People who own their homes tend to take care of them better, stay put, raise families, keep working . . . this all equals a stable society.

Last thought - deducting mortgage interest would mostly benefit the rich. If this deduction were introduced only for the lowest tax bracket, I could see this being an incentive for renters to become owners.


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## I'm Howard (Oct 13, 2010)

This logic is so skewed and onecan only imagine the nightmare it would create in trying to apply it, how the heck can you come up with a taxable figure on an assets whose value is arbitrarily decided by the market and changes continuously?

The flip side is that if such a craziness was pursued, then all costs associated with Home Ownership should be deductible.

The Housing Industry is vital to our economy, that is why it is encouraged.

Renters are expected to eventually become home owners.


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## Jungle (Feb 17, 2010)

You can get a credit if your income was low :

http://www.rev.gov.on.ca/en/credit/oeptc/index.html


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## andrewf (Mar 1, 2010)

That's just a credit, and not a deduction.



> The Housing Industry is vital to our economy, that is why it is encouraged.


Whether people rent or own, they still live in a residential property.



> Renters are expected to eventually become home owners.


It doesn't necessarily make sense for every single person to own a property.

There are also downsides to home ownership: illiquidity, and reduced labour mobility. The latter is a big factor in US unemployment. People are tied to homes that are underwater on their mortgages, making it harder to move for work. But the relative merits of home ownership vs renting don't seem relevant here. It's that renting receives less favourable tax treatment.

I'm not sure what the answer should be. Allowing people to deduct a portion of their rent from income (like, 50% up to a maximum per year)?


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## Jungle (Feb 17, 2010)

andrewf said:


> That's just a credit, and not a deduction.


Correct. Deduction only reduces taxes owing; credit gives you money. 

You can counter argue that the money saved (then invested) by renting will make up for more than the tax allowance and wealth opportunities of property ownership.


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## Barwelle (Feb 23, 2011)

What are the rules on renting out a room or two in your principal residence?

Are you subject to capital gains? You do have to report this as income, correct? Would you be able to claim any expenses as deductions, as you can with a rental property?

Is a portion of the mortgage deductible?


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## OhGreatGuru (May 24, 2009)

andrewf said:


> When you own your home, you enjoy certain tax advantages, including tax free capital gains, and no tax on the implied rent of the property (what rent you avoided paying by using the house you own). When you rent your home, you do not enjoy any of these tax advantages. You don't get to deduct any of the rent amount from your income. Additionally, the landlord is subject to any capital gains on the property and must pay tax on the net rent income. All this adds up to home ownership getting preferential tax treatment to renting. There are a couple problems with this that I see, but the most important is that it distorts behaviour toward home ownership. In my opinion, it should be tax equivalent for Person A to live in a home they own and Person B to live in a home they own vs. Person A living in Person B's home and vice versa. As it stands, the former receives better tax treatment.
> 
> Seems a bit unjust, no?


Well then, how about making mortgage payments; utilities; insurance; property taxes; all maintenance costs tax deductible too? Not to mention giving me a tax refund on all the hard-earned money I had to save for a downpayment? That would be fair treatment to making rent tax deductible.

Unlike rent, increases in homeowner's operating costs are not limited by a rent control board.


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## andrewf (Mar 1, 2010)

In that event, the capital gains tax exemption would need to be eliminated. Maybe that would be the best solution.

It would also only exempt the property tax and mortgage interest, not the entire payment. Typically, rent is exclusive of utilities and insurance.

Edit: Rent control should be eliminated, no matter what else happens. It's already fairly weak in Ontario, but it should be eliminated. If renters want price security they should negotiate it into their lease.


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## cannon_fodder (Apr 3, 2009)

andrewf said:


> Primary residence mortgage interest deductibility would make the imbalance in tax treatment worse, not better.


If the government implemented mortgage interest deductibility, I believe house prices would rise commensurately to approximate previous after tax costs for holding a mortgage. Ultimately, I think it would be bad for Canadians.


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## OhGreatGuru (May 24, 2009)

OhGreatGuru said:


> Well then, how about making mortgage payments; utilities; insurance; property taxes; all maintenance costs tax deductible too? Not to mention giving me a tax refund on all the hard-earned money I had to save for a downpayment? That would be fair treatment to making rent tax deductible.
> 
> ...


I was not actually arguing in favour of any of these. Just trying to point out the ridiculousness of OP's claim that renters are unfairly treated compared to homeowners.


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## andrewf (Mar 1, 2010)

I'd say you failed. Renters face many of the same costs.


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