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Chapter 7 investigated the acquisition and holding decision for active, owner-occupied real estate. In addition to the issues surrounding owner occupancy, investment real estate involves actual rental revenues and tenant management, as opposed to imputed rent. Depreciation expense is included in the economic calculation of returns to investment, owner occupied or not. If tax laws permit accelerated depreciation at a rate greater than the economic depreciation rate, real estate provides an additional source of cash. Accelerated depreciation either reduces tax payable or, typically in early years of an investment, creates or increases tax losses, generating a source of cash from tax refunds. The rate of return depends on tax policy, including the permitted depreciation schedule, asset life over which depreciation expense is claimable, marginal tax rates, and the extent to which losses on real estate investments are deductible against other income.

This paper examines how personal income taxation has changed across countries and whether and how this has affected the taxation of owner-occupied dwellings. It presents a partial analysis as it focuses on imputed rent taxation and the mortgage interest deduction. Furthermore, the paper places housing taxation in a wider context by describing different benchmarks which could be used to assess the taxation of owner-occupied housing in different types of personal income tax. These international and theoretical points-of-departure are used to evaluate the taxation of owner-occupied housing in the Netherlands. The paper concludes that all along political arguments have conquered theoretical premises to the advantage of the owner occupier in comparison to the private landlord. It also concludes that the theoretical base in 2001 has become so weak that owner-occupied housing is in an exceptional position in comparison with other private wealth thus becoming an easy victim for future tax savings.

The non-taxation of homeowners' imputed net rental income is recognized as inequitable and non-neutral, but is often felt to be unavoidable for practical reasons. It may be feasible, however, to tax imputed rental income indirectly if tax deductions were allowed for the residential interest expenses of both tenants and homeowners with the offsetting personal income tax rate adjustments made in a distributionally neutral fashion. That such a provision would improve tax equity is demonstrated with Canadian data. Allowing such deductions in Canada would facilitate homebuying by admitting many more families to the market although homeownership would ultimately become more expensive.