The Design of a Tax Rule for Owner-Occuped Housing Under a Personal Consumption Tax

Abstract

Abstract Analysts agree that designing a satisfactory tax rule for owner-occupied housingposes a senous challenge for the personal (cash flow) consumption tax that recently has been introduced in Congress by several senators. We compare tax rules for owner-occupied housing by performing numerical simulations for a person who begins as a renter, then becomes an owner-occupier, and ends as a renter. We show that the most commonly offered tax rule—prepayment with mortgage spreading— yields a time path for taxes over the person's life that is not fully satisfactory. We then show that this time path can be improved if the tax rule is modified so that prepayment with mortgage spreading is coupled with downpayment spreading, tax deferral, and capital gain or loss inclusion. Interestingly, a mortgage interest deduction, together with taxation of the nominal capital gain at sale, may represent an imperfect implementation of tax deferral.