The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: mcampbell on February 13, 2016, 03:41:43 PM
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I found out in the Netherlands apparently when you own a home, you have to pay income taxes on what the rent would have been. Which is crazy but makes me think that living in your house is kind of like a tax free coupon or income that other investments don't get the same treatment. Seems that's why a lot of FIREs own their house cause it ends up being s large tax savings versus selling investments and paying 15% and paying rent
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It's a great way to hide money from the government and reduce taxes. Especially with the principal residence exemption here.
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Interesting point. It has always been my understanding that MMM is able to live on 25K/year because of the paid off house. If the house wasn't paid off, his expenses would be 40K/year. Because interest rates are so low many people argue against paying off a house early. However, if MMM had to sell 40K/year of investments his tax burden would be higher. The numbers could vary in many different situations. However, overall the tax system seems to favor those who can survive on less income. If everything is paid off, the money you need to survive tends to be lower.
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I'm not sure why some people have a hard time wrapping their heads around this, but there is always a cost to living in a dwelling. Someone will pay for it, and if you don't want to sleep under a bridge, you're the one paying for it. If you don't own a home, you pay someone else rent. If you do own a home, you've got a giant capital expense. Your lack of paying someone else rent is your imputed rent, which is the return on your capital and is every bit as much a real form of income as getting a check every month (even if it's not taxed).
Not understanding this leads people to make crazy conclusions, such as the weird meme that owning a home isn't an actual investment, when in fact drawing rents off of it definitely makes it an investment, possibly a great or a terrible one, but an investment nonetheless. Real estate draws income; you either choose to extract it from someone else or consume it yourself.
And yes, MMM's budget should realistically reflect his imputed rent, because his capital costs are very high. He could always divest his house and invest the money elsewhere...in which case he'd make a bunch more income but would have to pay rent. Assuming it's a wash, his budget would reflect a lot more spending, even though his financial situation would be identical. Which is another way of saying that he's currently spending a lot on rent which he doesn't account for, because he earns it all back on his very large investment in housing.
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I'm not sure why some people have a hard time wrapping their heads around this, but there is always a cost to living in a dwelling. Someone will pay for it, and if you don't want to sleep under a bridge, you're the one paying for it. If you don't own a home, you pay someone else rent. If you do own a home, you've got a giant capital expense. Your lack of paying someone else rent is your imputed rent, which is the return on your capital and is every bit as much a real form of income as getting a check every month (even if it's not taxed).
Not understanding this leads people to make crazy conclusions, such as the weird meme that owning a home isn't an actual investment, when in fact drawing rents off of it definitely makes it an investment, possibly a great or a terrible one, but an investment nonetheless. Real estate draws income; you either choose to extract it from someone else or consume it yourself.
And yes, MMM's budget should realistically reflect his imputed rent, because his capital costs are very high. He could always divest his house and invest the money elsewhere...in which case he'd make a bunch more income but would have to pay rent. Assuming it's a wash, his budget would reflect a lot more spending, even though his financial situation would be identical. Which is another way of saying that he's currently spending a lot on rent which he doesn't account for, because he earns it all back on his very large investment in housing.
Can't aurgue with any of that.
But I'd hope that A) no fuckwit like bernie sanders get the notion to start taxing it and B) if it does happen, I can deduct expenses against it, and/or capital gains are eliminated on homes taxed as such. Either way, I having a feeling the expenses would almost wash the 'income' aspect of it, and we'd end up paying more in taxes PLUS having a bunch more accounting to do.
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There's a discussion of it here: Taxing Homeowners as if They Were Landlords (http://economix.blogs.nytimes.com/2013/09/03/taxing-homeowners-as-if-they-were-landlords/)
And a follow up (http://taxfoundation.org/blog/bruce-bartlett-imputed-rent) from Tax Foundation
You'll notice both of those of those are "right-leaning" (the first article is from someone who served policy positions in the Reagan and senior Bush administrations)
They agree that there are lots of inconsistencies in the tax code, but changing anything is politically in-feasible.
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Just to make it a little more complicated, Jim Collins points out that there would be significant financial benefits if two families in more or less identical hoses just switched, each becoming the tenant -and landlord- of each other due to the favorable tax treatment given rental property regarding maintenance and depreciation.
He admits that is not practical, but for social and psychological reasons, not that it doesn't make good economic sense.
And with the most popular show on television being a never-ending allegory of the need to fort up, ready stab a katana in the head of any neighbor within biting range, who would argue that point?
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I found out in the Netherlands apparently when you own a home, you have to pay income taxes on what the rent would have been. Which is crazy but makes me think that living in your house is kind of like a tax free coupon or income that other investments don't get the same treatment. Seems that's why a lot of FIREs own their house cause it ends up being s large tax savings versus selling investments and paying 15% and paying rent
I am not sure where you got that information from about the Netherlands. It's is not correct AFAIK.
You actually get a tax deduction on the mortgage interest paid same as in the U.S. (one of very few European countries).
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In Switzerland that is definitely the case, and you can deduct mortgage interest from that. Plus the value of the house is also taxed in the total wealth tax. All in all it makes sense, since you draw the income (by living in it) you pay taxes on it. (Taxes are also very low, there)
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Interesting point. It has always been my understanding that MMM is able to live on 25K/year because of the paid off house. If the house wasn't paid off, his expenses would be 40K/year.
This is true.
Because interest rates are so low many people argue against paying off a house early. However, if MMM had to sell 40K/year of investments his tax burden would be higher. The numbers could vary in many different situations. However, overall the tax system seems to favor those who can survive on less income. If everything is paid off, the money you need to survive tends to be lower.
This is not necessarily true. His tax burden may be slightly less (though that's debatable), but he'd very likely come out ahead with the house not paid off, but the mortgage money invested. Tax treatment is just one factor in that. He prefers the paid off home, but the tax benefits of not having to withdraw 15k more in capital gains, from 25k to 40k, isn't the motivating factor there.