In the tax code owning your own home is favorable because you don’t show the rent you are really paying yourself. Economists call it imputed rental income. Essentially, you are on the one hand a landlord and on the other the tenant but you don’t report the income but you do take (some of) the expenses (interest deduction, property tax deduction, etc.) On the other hand, when you own a rental you not only get the interest deduction and the property tax deduction, you also get depreciation expense, maintenance expenses, etc. and you get all of these above the line. But on the third hand (?) you also report the rental income above the line, have to recapture the depreciation upon sale (maximum 25% rate) and don’t get the $500k (or $250k if single) section 121 exclusion when you sell.
Proposals are made periodically to eliminate the home mortgage interest deduction. If that happened, I thought it might make sense for two people to each buy a house as a rental and rent to each other thus being able to get the interest deduction and foil the change to the code. As is my wont, I dramatically overbuilt a spreadsheet model and have included most everything you can imagine. It shows the difference between buying a home and buying a home and renting the same home to yourself. (Which you could essentially do with the swap situation I mentioned.)
I actually think the mortgage interest deduction should be eliminated. As a deduction it helps higher income people more (and those who make so little and spend so little they don’t even itemize not at all), and it is on up to two homes. We are subsidizing second home ownership in the tax code? On up to $1,000,000 (and another $100,000 if the taxpayer isn’t in AMT) of mortgage? But only if you use leverage? This seems like the opposite of a good idea.
As I usually do, all the yellow cells are the inputs. The outputs are the IRRs for the Owner vs. the Landlord. Interesting spreadsheet, I think.