Federal Tax Regulations and the Housing Demands of Owner Occupants

Abstract

While economists have been analyzing the demand for housing for decades, researchers have only recently begun to investigate the complex impact of the federal tax treatment of homeownership on the housing market. Several provisions of the federal tax code confer substantial direct benefits to homeowners (Rosen 1979a, 1979b; MacRae and Turner 1981), while substantial indirect benefits are transferred to homeowners, landlords, and housing producers at the expense of renters (White and White 1977). These provisions are: (1) the exclusion of imputed interest on homeowner's equity from federal taxable income, (2) the inclusion of mortgage interest and property tax payments as taxdeductible items, and (3) the favorable treatment of capital gains. From the perspective of the individual household, these provisions result in a potentially lower price of housing services and a high aftertax income if the household is a home-