Tenure Decisions Under a Progressive Tax Structure

Although certain provisions of the federal tax code provide subsidies to homeowners, others provide subsidies to renters in the form of tax incentives for investments in rental housing. We demonstrate that the renter subsidies dominate for households in low tax brackets whereas homeowner subsidies dominate for households in high tax brackets. Moreover the dollar magnitude involved in the tenure decision can easily push a household across tax brackets. Based on this relation, we identify an upper bound on the value of a dwelling that a household with a given income will prefer to own rather than rent for tax purposes. If the household were to choose a dwelling valued in excess of this household‐specific upper bound, the tax effect would reverse and favor renting. This complication provides a possible explanation for apparent tax anomalies in tenure decisions, i.e., high income renters and/or low income homeowners.