The Most Absurd 'Loophole' in the Tax Code

The Most Absurd 'Loophole' in the Tax Code

And I mean absurd in the most literal sense. We all know that the U.S. tax code is riddled with “loopholes”, exemptions and deductions intended to incentivize certain activities. Many of these are of dubious provenance and questionable utility. But, there is one that is particularly ridiculous. As in, how can this possibly be thought of as a loophole? But, to the technocrats in the federal government, the tax you don’t have to pay on the value of rent you don’t have to pay because you own your home is a loophole. 

Read that last sentence again. Its called “The Imputed Net Rental Income on Owner-Occupied Housing” and the feds include it in their annual list of “tax expenditures.” That term is how Washington officially refers to credits, deductions and exemptions. Here’s how the federal government describes it:

Under the baseline tax system, the taxable income of a taxpayer who is an owner-occupant would include the implicit value of gross rental income on housing services earned on the investment in owner-occu-pied housing and would allow a deduction for expenses, such as interest, depreciation, property taxes, and other costs, associated with earning such rental income. In con- trast, the Tax Code allows an exclusion from taxable in- come for the implicit gross rental income on housing ser- vices, while in certain circumstances allows a deduction for some costs associated with such income, such as for mortgage interest and property taxes.

Let’s say you own a home and your mortgage is $1,000 a month. If, however, you instead rented the home from a landlord your rent, let’s say, would be $2,000 a month. To the mandarins at the IRS, you are “earning” an implied $1,000 a month because you own and not rent, and that “value” should be added to your taxable income. If you own your home out-right and don’t have a mortgage at all, you would be “earning” $2,000 a month which the IRS thinks should be added to your taxable income. 

I have no doubt there is an elaborate, overly complicated theory for how this makes sense. But elaborate, overly complicated theories are also often silly. I own a car. If I didn’t, I would have to rent one from a rental firm, which would be considerably more expensive. Is the difference between my car payment and hypothetical rental fees something I “earned” which should be added to my taxable income? 

Yes it is, say the bureaucrats in Washington. 

This, to me, is a sign of how big a challenge we face in reigning in Washington. When the feds consider money I don’t have to pay because of a choice I made as a taxable event, then the leviathan is truly all-consuming. 

Oh, and the feds list this exemption as one of the top “loopholes” in the tax code. They estimate that it “costs” the feds over $50 billion a year to not levy this tax. Yes, in Washington, items exempt from taxation are considered “costs” the government bears. This may be true in a strict economics sense, but it is also very revealing of how the government looks at its citizens. 

Any scrap they let us keep is a “cost” they are kind enough to bear. 

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