Landlords get all the same tax breaks that you do on the houses they own – and live in – but, in addition, landlords also get a ton of additional tax breaks on ALL their rental properties that you don’t get on your one house. 

Invisible Subsidies to Landlords of Single-Family Houses

The tax code essentially pays investors to buy single-family houses which corrupts price signals, distorts the free market, and lowers home ownership for people like you who actually live in their homes.

Here’s a partial summary list of landlord tax breaks (tax incentives) on single-family houses in the U.S.

  • Depreciation. Landlords get annual “depreciation” tax deductions even when the house appreciates in value! The house could go up $100,000 in a year and the landlord would still get a tax reduction for (non-existent) depreciation. This one tax deduction lowers home ownership two different ways. The tax break on imaginary depreciation makes it, 1) more profitable for landlords to buy and own houses and, 2) less profitable for landlords to sell houses because of the depreciation recapture tax they might pay when they sell. The fact that landlords get a tax deduction for “depreciation” on appreciating rental houses shows how incredibly distorted the U.S. tax code is in favor of landlord ownership of single-family houses.
  • Bonus Depreciation. If that’s not crazy enough, in recent years, right when house prices and landlord purchases were skyrocketing, landlords were getting “bonus” depreciation so they often paid zero income taxes for several years even though they were pocketing big money from their rental houses and the value of their rental houses was skyrocketing in real life.
  • 1031 Exchange. After they sell a rental house, the 1031 Exchange rules in the tax code let landlords defer paying ANY capital gains taxes on the sale – often forever – if they buy another property. Investors can’t defer paying capital gains taxes when they sell stocks or bonds, so the 1031 Exchange gives investing in single-family houses and condos an advantage over other investments, and more investor money chases homes.
  • Mortgage Interest & Property Taxes. All landlords can deduct from their taxes all the state and local property taxes and mortgage interest they pay on all their rentals. Only about 12% of personal income tax filers even itemize their tax returns which is needed for live-in home owners to be able to deduct their property taxes and mortgage interest payments from their taxes.
  • No Social Security Taxes. The landlord next door doesn’t have to pay Social Security or Medicare taxes on their rental income or on their profits when they sell the house like you do on your ordinary wage and salary income.
  • Tax-Free Profit Taxing. Landlords can take capital gains profits tax-free by doing cash-out refinancings. In addition, the interest on their new cash-out, profit-taking, refi mortgage is also tax deductible.
  • Capital Gains Tax Rate. The tax rate on landlord capital gains – when and if paid – is usually a lot lower than the taxes the live-in home owner next door pays on their ordinary wage and salary income.
  • Pass-Through Business Deduction. A 20 percent tax deduction for income from sole proprietorships, partnerships, LLCs, REITs, trusts, and S corporations.
  • Reduce Tax Paid on Ordinary Earned Income. In some cases, the paper (tax) losses on rental properties can reduce taxes owed on ordinary earned income.
  • Stepped-Up Tax Basis. The stepped-up tax basis on the death of the landlord makes owning rental houses a good way to reduce their estate taxes, and those reduced taxes increase the demand to own rentals, at least for people who want to minimize their estate taxes.
  • Tax Treatment of Losses. When a landlord loses money selling a house, the loss becomes a tax deduction for the landlord but when a home owner loses money selling the house they live in, it isn’t a tax deduction. 

Let me know the landlord tax breaks I’ve missed.

“If you invest in real estate and you’re paying taxes then you’re doing it wrong” – Clayton Morris.

In addition, you may be pocketing money on your rentals and not paying taxes on the income but, in some cases, owning the rentals can REDUCE the amount of taxes you owe on your other income!

The tax code does NOT allow you to rent your house to yourself so primary-home owners can’t take any of those landlord tax breaks.

The demand from investors to buy and own single-family rentals is, to a large degree, driven by the tax code, not the free market.

Landlords aren’t the problem. The problem is the tax code.

76 Secrets of U.S. Home Ownership – Table of Contents