More Will Choose To Rent In The Future As Tax Breaks Decline

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If you rent property to tenants, the outlook for your business and future rental customers is continuing to get better and better. While your apartment and single-family home tenants know that renting has always offered more flexibility for them, the great tax benefit of homeownership is not what it once was.

By John Burns

Real Estate Consulting

More renters are realizing that homeownership does not provide the tax breaks it once did and that renting is a better deal for them than owning, according to a new study from John Burns Real Estate Consulting.

More Will Choose To Rent In The Future As Tax Breaks Decline Says John Burns

John Burns

“We believe we have found one of the primary reasons why entry-level home buying has not recovered—and why homeownership has been plunging,” writes John Burns in his market intelligence report. “For decades, homeowners benefitted from both the financial and psychological benefits of paying less taxes. Homeownership came with income tax savings because mortgage interest plus property taxes easily exceeded the standard deduction allowed by the IRS,” Burns writes in the report.

For Many The Tax Savings Is Gone 

For most American homeowners that has not been true since 2008 because:

  • Falling interest rates and home prices have reduced mortgage interest.
  • The standard marital deduction has risen from $1,300 in 1972 to $12,600 today, meaning that the first $12,600 of itemized deductions has no benefit to consumers.

“Today, a typical first-time home buyer financing 95% or less of a median-priced US home pays less than $12,000 in mortgage interest and property taxes, which is not enough to warrant itemizing. Even with other deductions that bring the taxpayer over the $12,600 limit, the tax savings are minimal," Burns writes in the report.

Rent vs. Buy 

"Years ago, we eliminated income tax savings from our calculation of the rent-versus-buy decision, and I cannot remember the last time I heard a prospective first-time home buyer (not in California or New York) mention income tax benefits as a reason for buying,” Burns says in the report.

In the graph below, “We show the change over time for a typical homeowner couple with an 80% loan-to-value mortgage and a 1.5% property tax rate on the median-priced US home. That owner paid mortgage interest and property taxes in excess of the standard deduction every year from 1972 to 2008. Today, that homeowner’s deductions fall nearly $2,500 short of the standard deduction.”

Why More Will Choose to Rent In The Future As Tax Breaks For Home ownership Decline by John Burns

Every April 15, the most financially qualified renters in the country used to feel the pain of not owning by writing a check to the IRS.

For most, that is no longer the case. The lack of tax savings is just one of numerous reasons why homeownership is the lowest it has been in decades, and we believe homeownership is headed lower.

Homeownership Headed Lower As Renting Becomes The New Normal

“This is just one of many findings in our upcoming book, which will be published later this year, called Big Shifts Ahead: Demographic Clarity for Businesses,” Burns writes.

The Urban Institute said last year in their analysis "The homeownership rate in the U.S., which has been declining since the housing boom, will continue to decrease for at least the next 15 years. The reason is simple: in the millions of new households forming over the next 15 years, new renters will outnumber new homeowners—causing a sustained surge of rental housing demand that will significantly affect millennials, seniors, and minorities, and expose important gaps in our current housing policies."

This article courtesy of John Burns Real Estate Consulting. If you have any questions, please contact John Burns at (949) 870-1210 or at jburns@realestateconsulting.com

About The Author

Before founding John Burns Real Estate Consulting in 2001, he worked at a national consulting firm for 4 years and for 10 years at KPMG Peat Marwick – 2 as a CPA and 8 in their Real Estate Consulting practice. John has a B.A. in Economics from Stanford University and an MBA from the University of California, Los Angeles, and works in our Irvine office. John has attended home games for all 30 major league baseball teams, seen every Academy Award-winning Best Picture, and regularly runs the hills in Southern California.

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