[Originally published on my substack in June, 2021.]

If the U.S. government stops distorting the housing market, we’ll increase home ownership, economic growth, economic equality, and stable family wealth creation.

We should at least get rid of these tax breaks for landlords of single-family houses and condos.

  • Depreciation tax deduction.
  • 1031 Exchange tax deduction.
  • Mortgage interest tax deduction.
  • Tax-free landlord profit-taking.
  • Taxes on capital gains being lower than income taxes.
  • Stepped-up tax basis.

How many of these landlord tax breaks did you know about? I learned about them from websites and YouTube.

There’s a minor industry online explaining all the tax breaks for landlords. Leave a comment with the landlord tax breaks I’ve missed.

Depreciation Tax Deduction – (Tax Deferral)

Get rid of the depreciation tax deduction for landlords because houses do NOT depreciate, they appreciate. It distorts the market for single-family houses and is a complete government giveaway to landlord owners that hurts live-in owners.

Essentially, the government is saying, “You landlord owners can pay us those taxes later, maybe.”

It’s like the government gives every landlord an interest-free loan every year but every year the landlord supposedly owes the government more money when the landlord eventually sells the house. 

The government doesn’t let the live-in owners next door put off paying some of their taxes indefinitely. 

Is that fair?

The first economic problem with the depreciation tax deduction is that it increases landlord cash profits every year which lets landlords pay more for houses so they bid up house prices for everyone. 

The second economic problem is that landlords are supposed to pay years of back taxes all at once when they sell a rental house. That means landlords make less money when they sell. That discourages landlords from selling their houses. That means less supply and higher house prices for everyone. 

So, the same tax break encourages landlords to buy single-family houses but it also discourages landlords from selling them. One tax break for landlord owners increases house prices for live-in owners two different ways. Genius!

Theoretically, since we currently have an annual deduction on (pretend) depreciation for landlords, couldn’t we have an annual tax on (real) appreciation for landlords? It’s the same logic but based on economic reality – houses appreciate, they don’t depreciate. And it would slow down house price increases two different ways.

Landlords aren’t the problem, they’re just playing by the rules of the game. Government tax rules, however, are a huge problem that lowers homeownership, economic growth, economic equality, and destabilizes family wealth creation.

Here’s a great Twitter thread where a real estate investor talks about the depreciation deduction.

1031 Exchange – (Tax Deferral)

When landlords sell their rental houses they’re supposed to finally pay the taxes they didn’t pay for all those years because they took the tax deduction on (pretend) depreciation.

But landlords don’t even have to pay those back taxes when they sell a rental house, if landlords just – get this – buy another rental house at the same time they sell one! What a crazy, huge tax break for landlords!

This tax break called a 1031 Exchange and it essentially pays landlords money if they’ll just buy another house at the same time they sell one. It greatly increases the demand for houses from landlords anytime they sell one which, of course, increases house prices for everyone.

The live-in owners next door can’t put off paying their taxes forever like that. 

Is that fair?

Mortgage Interest Tax Deduction – (Tax Reduction)

Landlord Owners vs. Live-in Owners. Most live-in owners don’t get a tax deduction for the interest they pay on their mortgages but all landlord owners get a mortgage interest tax deduction on all of the mortgages they have on all of their rental houses. The government is essentially paying for part of every landlord’s mortgage so landlords can pay more for houses and bid up house prices for everyone. 

Is that fair?

Family Financial Instability. By subsidizing landlord debt, the government encourages landlords to take on more debt than they would otherwise. 

The subsidy increases landlord owner profits and encourages investors to jump in during the good times and that makes house price booms even bigger. But then in the bad times, landlord owners have more debt and more quickly go underwater when house prices fall. Underwater landlord owners are more likely to walk away than underwater live-in owners, and that makes house price busts bigger. 

Both of those side effects of the mortgage interest tax deduction destabilize house prices, the economy, and family wealth.

Is that fair?

Fewer Jobs Created. Single-family houses have a huge natural advantage over most other investments because you can borrow a lot more money when you invest in houses compared to investing in stocks or most other things.

For example, if you invested $1 in stocks, you might be able to use that $1 worth of stocks as collateral to borrow another $1 to buy more stocks. But if you invested $1 in rental houses, you might be able to borrow another $3 to buy houses. That means with $1 to invest, you could own $2 worth of stocks or $4 worth of houses. If the price of stocks and houses both double, your $1 investment makes you $3 on the stocks but $9 on the houses.

Since you can borrow 4 times as much when you invest in houses, that also means your government subsidy (the interest tax deduction) is also 4 times greater.

The mortgage interest tax deduction for landlords takes that natural advantage of being able to borrow a lot more money and makes it unnaturally large, and causes an unnaturally large number of single-family houses to become landlord-owned.

For the economy as a whole, the problem is investing in single-family houses that were built many years or decades ago creates a lot fewer jobs – per dollar invested – than investing in businesses that are making things today, and providing services today, and creating jobs today.

When you subsidize landlord mortgage debt, it unnaturally skews investment toward single-family houses and away from investments that create more jobs per dollar invested.

Is that fair for everyone else in the economy?

Tax-Free Landlord Profit – (Tax Deferral)

The landlord is making money every year on the rent but, in addition, the house is appreciating and is worth a lot more than what the landlord paid. The landlord could sell the house to get that money but then the landlord might have to pay taxes on the profit.

Instead, the landlord can just take out a second or third mortgage on the house and pocket all that cash… tax-free.

If the landlord used the money from that second or third mortgage to help buy another property, the interest on the tax-free cash out would be tax-deductible.

The tax-free profit-taking lets landlords defer paying taxes, sometimes forever, which increases landlord profits and that lets landlords pay more for houses so they bid up house prices for everyone.

This is another way the government subsidizes landlord debt but, as mentioned earlier, more landlord debt makes real estate busts bigger.

In addition, these tax breaks for buying things made long ago tend to divert money away from investments that would create more jobs and economic growth today.

Is that fair?

Taxes on Capital Gains are a Lot Lower Than Taxes on Ordinary Income – (Tax Reduction)

Landlord owners pay a lot less on their capital gains income than the live-in owners next door pay on their wage and salary income.

It’s true that when live-in owners sell their homes they don’t have to pay taxes on the first $250,000 (single owner) or $500,000 (married couple) of capital gains profit. But that’s also true for landlords when landlords sell the homes they actually live in.

Other than that, live-in owners pay a lot higher taxes on their ordinary income than landlord owners pay on their long-term capital gains income. No wonder landlords can bid up house prices for everyone.

Is that fair?

Stepped-Up Tax Basis – (Tax Reduction)

If a landlord sells a rental house and leaves the money to the landord’s heirs, the landlord would have to pay back all the taxes deferred over all those years, for example, the taxes deferred using the depreciation tax deduction on (imaginary) depreciation. In addition, the landlord would have to pay capital gains tax on the profit, the appreciation in the value of the rental house.

But if the landlord doesn’t sell the house and just leaves the rental house directly to the landlord’s heirs, the heirs never have to pay either tax on any of the houses they inherit from the landlord.

The stepped-up tax basis forgives all the back taxes the owner owes on the house when the owner dies.

This is an enormous advantage for investing, including investing in single-family houses, for those who are willing and able to invest. It’s also another great reason to defer paying taxes as much as possible and for as long as possible.

The future tax reduction is so huge some older landlord owners won’t sell now so in the future their heirs can pocket all the money the landlord owners would have had to pay the government if the landlord owners had sold their rental houses themselves.

Once again, the government is essentially paying landlord owners not to sell which lowers the supply of houses for sale.

When people buy and hold houses for the huge estate tax advantages it lowers supply, increases prices, and distorts the market for single-family houses.

Is that fair?

6 Distortions of the Housing Market

All 6 landlord tax breaks distort the market for single-family houses to the advantage of landlord owners and to the disadvantage of live-in owners but also to the disadvantage of the U.S. economy as a whole.

Here are 4 More

Bonus Depreciation. If the landlord tax break for pretend depreciation wasn’t bad enough, the 2017 tax bill made the tax break even bigger with “bonus depreciation.” Landlords could avoid paying taxes on the income from their rental houses for years! Bonus depreciation increased the profitability of buying single-family rentals so landlords bought even more single-family houses during the COVID boom. House prices increased even more for everyone due to bonus depreciation for landlords.

20% Pass-Through Tax Deduction. This is new. It just started in 2018. Most landlords, including most single-family landlords, “can deduct up to 20% of their net business income from their income taxes, reducing their effective income tax rate by 20%”.

Property Tax Deduction. Like the mortgage interest deduction, most live-in owners don’t get a tax deduction for paying their property taxes because they don’t itemize. All landlord owners, however, get a tax deduction for paying their property taxes.

Reduce Taxes on Other Income. Landlords can make money in the real world but lose money in the paper tax world, and then, in some cases, they can use those paper tax losses to reduce the amount of real money they have to pay in taxes on their real, ordinary income, or their spouses’ income.

All three tax breaks let landlord owners pay less in taxes and make more money. That, in turn, lets landlord owners bid up house prices for everyone and slow economic growth for the country.

What landlord tax breaks have I missed?

Landlords get other tax breaks I haven’t mentioned. Tell me in a comment.

I’m not an accountant. I’m just an economist trying to explain simply, in everyday English, what I’ve found online.

2 Sets of Rules for Single-Family Houses

Tax breaks for landlords don’t distort the market for apartments the same way they do for single-family houses because all apartments are owned by landlords. All apartment owners face the same tax system.

Single-family houses are different.

The problem is landlord owners face a completely different tax system than live-in owners, but live-in owners have to compete directly with landlord owners – and all their tax breaks – when live-in owners buy single-family houses and condos for their families to live in. 

Landlord owners are not only displacing live-in owners, but they’re also destabilizing live-in owners financially. Real estate booms and busts are a lot larger with investors jumping into and out of the market. The result is more unstable wealth for the American families that do own their own homes. 

The home ownership rate isn’t much higher today than in the 1960s despite real median family income being 50% higher. That’s because landlord income has increased as well due, in large part, to the landlord tax breaks. Without the landlord tax breaks, the U.S. home ownership rate would be higher today.

It’s gotten so bad now that some large landlords are actually buying up entire subdivisions of brand new, single-family houses and turning them into rentals. That’s how big the government giveaways are to landlords.

If landlords want all those crazy landlord tax breaks, no problem, they should buy apartments where all owners face the same crazy generous tax system.

Fixed Supply of Single-Family Houses

Usually, when the government gives tax breaks to some people to buy and own a product it doesn’t hurt other people. If the government lowered taxes on cars for some people, that wouldn’t make cars much more, or any more, expensive for other people.

The people with the tax break wouldn’t have to buy cars away from the people without the tax break because global car manufacturers would just increase their production as needed within several months or a year. Car prices wouldn’t necessarily go up much, or at all.

Houses are different. The supply of houses increases extremely slowly and is fixed in the short run. In addition, houses are immobile. You can’t import houses from Japan or Germany when the demand for houses increases in your town.

The natural economic ecology of a product with such a fixed, inelastic supply like houses is that prices are very sensitive to increases in demand. Small increases in demand for single-family houses cause surprisingly large increases in house prices.

House Supply More Fixed Than Gold Supply

I did a quick search online a few years ago and found the supply of single-family houses in the U.S. is more fixed than the supply of gold globally. And since you can’t ship houses to wherever demand is highest like you can with gold, the supply of houses in the average U.S. neighborhood is far more fixed and inelastic than the supply of gold internationally.

Because the supply of houses increases more slowly than the supply of gold, house prices are naturally very sensitive to increases in demand. Small increases in demand for single-family houses – for any reason – cause surprisingly large increases in house prices. 

An economic historian, for example, documented a large housing boom and bust in Amsterdam in the mid-1600s… and another in the early 1700s… and another in the late 1700s.

200 Years Of Amsterdam Housing Bubbles

Source: Working Paper, “The First Housing Bubble? House Prices and Turnover In Amsterdam, 1582-1810,” Matthijus Korevaar, 2018.

Houses are naturally prone to price bubbles because the amount of money chasing houses can increase a lot faster than houses can be built whether in the mid-1600s or 2021.

It doesn’t matter why the money chasing houses is increasing, only that the money chasing houses is increasing faster than houses.

Houses for Homes, Not Tax Shelters

Why are we making houses a tax shelter where a large part of the value of owning houses for some owners is the value of the tax breaks they get instead of the value of houses as homes for families.

When the government essentially pays landlords to own single-family houses, landlords will naturally own more single-family houses. It distorts the market and hurts live-in owners and the economy.

The government is essentially paying to make some people renters instead of homeowners.

Removing all the landlord tax breaks on single-family houses and condos would level the playing field for live-in owners.

Don’t worry, in this scenario, landlord owners would still be able to take full advantage of all the tax breaks live-in owners get – but only on the houses the landlords actually live in – not every house they own.

Landlord owners would get the exact same tax breaks as live-in owners but not more.

That’s fair.


For single-family houses and condos;

  • Get rid of the depreciation tax deduction, at least on all future house purchases.
  • Get rid of the 1031 Exchange tax deferral, at least on all future purchases and immediately stop all 1031 Exchanges into single-family houses and condos.
  • Get rid of the mortgage interest tax deduction, at least on all future landlord mortgages.
  • Tax profits when profits are taken not when the house is sold.
  • Tax landlord profits as ordinary income.
  • Get rid of the stepped-up tax basis on houses that weren’t the grantor’s primary residence.

And, of course, landlords get other tax breaks and those should also be removed to stop distorting the market for single-family houses and condos.


Don’t worry, removing landlord tax breaks will not increase rents on single-family houses and condos despite what the single-family rental industry screams.

Let’s say there are 2 absolutely identical rental houses next door to each other. One is owned by a landlord who has a large mortgage on the house and the other is owned by a landlord who owns the house free and clear.

Can the landlord who has more expenses – the one with the large mortgage – charge more rent than the rent charged on the identical house next door? No. Having more expenses – whether mortgage, tax, or whatever – doesn’t let landlords charge higher rent.

Getting rid of landlord tax breaks doesn’t mean landlords will charge more rent, it means landlords will eventually own fewer houses… and that means home ownership will eventually increase.

Home ownership will naturally increase when landlords stop getting subsidies that live-in owners don’t get.

Example. Remember interest rates fell a ton in 2019 and 2020 which also reduced landlord mortgage expenses a ton. Did rents fall with landlord mortgage payments? No. In fact, landlords raised their rents incredibly sharply in 2021 despite their much lower interest expenses.

“But Supply Will Fall!”

Yes, when a landlord-owned house is sold to a live-in owner the supply of single-family houses to rent falls by one house, and that lower supply will, theoretically, put upward pressure on rents.

But at the same time, the demand for rentals will also fall by one family, and that lower demand will put downward pressure on rents. The new live-in owner is out of the rental market, most likely permanently.

The balance between supply and demand remains the same. Rents don’t increase.

When a single-family rental house is sold to a live-in owner, it’s true that the supply of rental houses falls by one house but it’s also true that the demand for rental houses also falls by one.

And So It Begins

“New Zealand will axe a tax benefit to property investors as it seeks to stop out-of-control house price growth across the nation that has pushed up values almost 25 per cent in Auckland alone over the past 12 months… it will axe the ability of property investors to claim mortgage interest as a tax deduction”, The Sydney Morning Herald, March 23, 2021.

Earlier, New Zealand had changed its tax laws so tax losses on landlord-owned rental houses couldn’t be used anymore to lower the taxes due on other income. They called this “ring fencing.”

From then on, tax losses from rental houses could only be used to offset taxable income from other rental houses. The tax losses from your rental houses couldn’t be used to lower your taxes on your wage and salary income.

That sounds fair.

Permanently Increase Economic Growth

If, because of the landlord tax breaks, house prices increase and buyers’ monthly mortgage payments increase, say, $100 per month, that’s $100 per month those live-in house owners won’t be spending on goods and services that create jobs for the next 30 years.

A 10% Multiplier?

Subsidizing landlord owners with tax breaks lets landlords pay more for their rental houses so they bid up prices for all single-family houses and condos. The live-in owners who pay those higher prices have less money to spend in the rest of the economy which slows economic growth.

That’s because when someone spends $1 toward buying a house that was built years or decades ago, that creates a lot fewer jobs today than if they had spent that same $1 toward buying services and goods produced today, that create jobs today.

The economic multiplier is a lot higher when people buy services or new things instead of buying things made decades ago.

Of course, when people buy existing houses some of the money goes to pay real estate agents, title, escrow and mortgage companies, etc. today which sets off a chain of new spending and economic growth. Let’s say the equivalent of 10% of the house price goes to pay them.

But that would mean 90% of the money spent on existing house sales doesn’t create new work in the current economy and, dollar for dollar, buying an existing house has a LOT less impact on generating additional spending and economic growth than buying most goods and services.

About 90% of the money went to changing the ownership of the house, it didn’t pay people for work they performed in today’s economy. That 90% didn’t grow today’s economy.

Artificially created house price increases suck money out of the real, productive economy and decrease economic growth.

Economic Inequality

Since landlord tax breaks unnecessarily increase house prices, they hurt those who don’t already own houses and that increases economic inequality. It makes it harder for groups that have below-average homeownership to catch up.

To make matters worse, landlord tax breaks lower home ownership, overall. The percentage of occupied single-family houses that are landlord-owned, increased 20% from 2000 to 2019 (from 13.2% to 15.8%)… and, of course, the primary-home ownership rate fell at the same time.

Increased Economic Fragility

Earlier I mentioned that housing’s fixed supply makes it extremely prone to large booms and busts. Since landlord tax breaks cause landlords to make more money, there are more landlords and they buy more houses during those house price booms than they would otherwise. When they see the values of their current rental houses increasing fast, they love those investments, and tend to jump into the market and buy more houses. That makes real estate booms bigger.

Live-in owners can only live in one house at a time so when house prices boom they don’t buy more houses.

However, ALL current landlords – and potential landlords – can buy more houses when house prices boom which, in turn, causes house prices to boom even more.

On the downside – and more importantly – landlord owners are more likely to walk away from houses they don’t live in when prices fall and they’re underwater. That makes price busts much worse. 

Overall, house purchases and sales from live-in owners are much more stable than house purchases and sales from landlord owners.


In the 2000s real estate bust, it was the investors who bought at the top of the market with high-foreclosure loans (liars loans, neg-am, etc.) who were the first to walk away and start the cascade of foreclosures. Fewer landlord foreclosures early on would have delayed the entire cascade of foreclosures, prices would have fallen much less, and the total number of foreclosures would have ended up being much smaller.

The government pays to destabilize house prices.

Government policies that essentially pay landlords – who can jump into and out of the market a lot more easily the live-in owners – destabilize house prices on both the upside and downside. And that destabilizes the economy and family wealth. In addition, recessions following real estate booms and busts tend to be the deepest and longest.

Is that fair?

The Future?

If those tax distortions are removed, single-family house and condo prices would increase more slowly but more steadily. People would spend, save and invest more, and more steadily. Some recessions wouldn’t be as deep.

Removing landlord tax giveaways would increase economic growth permanently. It would also stabilize house prices, the economy, and family wealth creation. 

More money would be spent in today’s real, job-creating economy instead of on houses built years ago. A small shift of money away from houses built years ago and toward things being made today would have a big impact on today’s job-creating economy.

U.S. economic growth would be larger every year, year after year. People will have a bit more money in their pockets every year, year after year. And that economic growth and income growth would be much more stable than currently.

Don’t artificially increase house prices.

Life is Crazy Enough

Life is unstable enough. We don’t need to have government tax and mortgage regulations making life a lot more unstable than it naturally is. 

If we wanted, we could greatly stabilize house prices, family wealth creation, and overall family stability, while at the same time increasing total U.S. economic growth. 

Or we could keep promoting bad economic hygiene that leads to wild house price fevers and recoveries that take years. 

In this crazy world, home ownership should help stabilize families. Health can be unstable. Work can be unstable. We can make home ownership more stable financially and emotionally for families so they have the energy to go out and make the world a better place with their work. 

Home ownership should never set another generation back a decade financially because they happened to hit first-time homebuyer age at the wrong time, like Gen-X.

We should protect the homeowners on Oak Street from the geniuses on Wall Street and Main Street. Let Wall Street and Main Street play their games on Wall Street and Main Street but don’t let them destabilize Oak Street.

Oak Street is more important than Wall Street or Main Street. It’s not a business. It’s where we live.

The Hardest Part

The hardest part is the transition to less distorting tax policies.

Many landlord owners will, no doubt, scream that removing their tax breaks is unfair and the end of the world as we know it.

Landlord owners have made a fortune off the appreciation of their rental houses over the last 12 months and that might make some landlords more, rather than less, indignant about the thought of changing the rules of their game. They’ll no doubt say that landlord tax breaks really help other people more than landlords.

Landlords did nothing wrong. They just followed the rules of the game. It’s the rules of the game that are wrong and need to change. 

The purpose of getting rid of landlord tax breaks is to increase home ownership, increase economic growth, reduce economic inequality, and help stabilize and increase family wealth creation.

The transition is the hardest part. After that, the benefits will flow continuously.

Distorted Back to Reality

Perhaps we could give landlords who are financially dependent on landlord tax breaks a huge, new – but very temporary – tax break to help them during the transition.

After all, most landlords are just following the rules of the game. Nevertheless, some landlords won’t be able to make money on all their houses in a freer market without government tax subsidies.

For those landlords who decide they don’t want – under the new rules – to own their single-family and condo rentals anymore, perhaps we could temporarily exempt the first $100,000 of profit they make – per house – from taxation when they sell houses to non-landlords.

But landlords already get so many tax breaks that $100,000 of tax-free profit per house might not be enough. Maybe we would need to temporarily exempt the first $250,000 of landlord profit per house after all the old tax breaks for landlords are permanently deleted.

Most of those tax-free landlord profits would immediately be reinvested right back into the economy – hopefully, into the productive, job-creating economy. Having that money moved into more productive investments would give the economy and the stock market a boost.

I’d prefer to find a solution that reduces the transition costs for landlords who are dependent on government subsidies. If some landlords do better financially with the temporary tax break than under the old rules, that’s fine.

In the end, the goal is to stop paying Wall Street and Main Street to buy houses on Oak Street, and to stop unintentionally destabilizing house prices, the economy and American families.

Stop Distorting the Housing Market

We need a tax system that distorts the housing market less and lets the free market work better. 

The goal is to stop the government from distorting the market for single-family houses and condos.

If we stop the landlord subsidies, the economy and family wealth will grow a bit faster every year – year after year. And the growth will be much more stable with smaller real estate booms and busts, and smaller and shorter recessions after the busts. More families will own the single-family houses and condos they live in. And after the transition period, this will cost the government nothing, year after year.

The best time to stop distorting the housing market was decades ago. 

The Great Recession wouldn’t have been “Great” if we didn’t have all those investor tax breaks.

The second best time to stop distorting the housing market is now. 

Much of the transition would be finished by mid-decade while the demographics of the U.S. housing market are still strong.


The real estate industry will nitpick every simplification I’ve made in this piece to distract from the point. 

We will increase, 1) home ownership, 2) economic growth, 3) economic equality, and 4) stable family wealth creation, if the U.S. government stops distorting the housing market with all the crazy tax breaks it gives to landlords of single-family houses and condos.

6 Crazy Tax Breaks Landlords Get

  • Depreciation tax deduction
  • 1031 Exchange tax deduction
  • Mortgage interest tax deduction
  • Tax-free landlord profit-taking
  • Taxes on capital gains are lower than on ordinary income
  • Stepped-up tax basis

Landlords who want to keep all those crazy tax breaks can simply buy apartments and commercial real estate instead of single-family houses and condos.

Landlords would still get the same tax breaks live-in owners get on single-family houses and condos – but only on the houses the landlords actually live in – not more.

That’s fair.