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Income tax from rental vs owning


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2013 Feb 15, 3:09am   2,629 views  4 comments

by ja   ➕follow (0)   💰tip   ignore  

Is the current tax structure distorning owning vs renting?

Let's say I have a house for 100k that produces 10k in rental income/year. A friend has a similar house. We rent our respectives houses to each other. Government takes 3k each year (assume 30% tax bracket).

If we live in our own houses, we are not paying anything in taxes.

Logical solutions:
- Income from rental should not be taxed.
- Calculate the benefit/income I'm receiving from my own house while living in it, and pay those taxes.

Does it makes sense, or am I smoking? Can I extrapolate to anything that can be rented (from a car to a washing machine to the sexual possibilities of your own body)

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1   gbenson   2013 Feb 15, 7:32am  

The govt has an interest in you owning vs renting, which is why it's structured like that. Owners can also deduct mortgage interest (at least for the time being). The idea is that home ownership breeds stability, lower crime, better standard of living, and eventually higher property values or expanding tax base as desirable neighborhoods expand. So they get it on the back end.

2   ja   2013 Feb 15, 8:03am  

Roberto,

Thx for your comment. But:

- Interest deduction is another different issue. Consider you bougth the house by cash.
- Other expenses are also beyond my point. For argument sake, consider that you live in a country/situation where you don't have to pay any of them (or they are very very low).

My point is that income tax doesn't make any sense, because they can only tax you when there is money involved, not when you enjoy the same benefit without money.

If it was a business expense (e.g. an office space), it wouldn't matter how much you paid, because you end up deducting it.

Is trading houses (just for living) even legal?

3   REpro   2013 Feb 15, 8:32am  

Do you know that some celebrities just do this from years? Especially with more expensive houses rent from each other is a killer tax deal.

Everything must be legal; lease contract, market rent, real exchange of money, etc.

4   Reality   2013 Feb 15, 9:30am  

That's why taxes in general, and income tax in particular, are called "negative bridges." Normal bridges bring parties together to trade, so that division of labor can take place through these exchanges, so everyone can do more of what they are good at, so more goods and services of higher quality become available to the society.

Taxes usually extract from exchanges. When the rates are high enough, people revert to autarky or self-sufficiency, breaking down the economy and lower standards of living for the society.

What you have observed also apply to almost every activity in life: if you grow your own vegetable, there is no tax; if you get really good at growing vegetables, and have excess to sell to your neighbors, you are subject to income tax. Your neighbor can be an excellent baker, so long as she bakes for herself there is no tax, but if she bakes for you in exchange for your vegetable, both of you are subject to tax!

That's why eventually when society breaks down like in late Roman time due to heavy taxation and run-away inflation, people gave up freedom as citizens and sold themselves to the big estates, which were singular "house-keeping" units for tax purpose. Trade with the outside were minimized in order to reduce tax bill. Of course, we are a quite ways from that, so we hope.

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