Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

In Australia, if you have a mortgage on the house you live in the interest and other expenses are not tax deductible, unless you rent out one or some of the rooms or run a business from your home, in which case only a portion of the interest and other expenses will be tax deductible. Similarly you don't pay any capital gains tax on selling the home if it is your primary place of residence and you have not earned any income from it.

What are the reasons (tax and legal) for interest being tax deductible on a house you live in in the USA without the house earning you any income? And similarly why is capital gains tax payable on the sale of such a property in the USA?

I have always wondered why this is the case in the USA, because in Australia the tax laws state that unless an asset produces an income, you cannot claim a tax deduction on the interest and expenses incurred in maintaining that asset. Also, our primary place of residence is exempt from any capital gains tax on the sale of the home.

share|improve this question

2 Answers 2

up vote 6 down vote accepted

Taxes are a tool for achieving social policy goals. While Americans consider "Socialism" to be a curse, the US is in fact quite socialistic. Mostly towards corporations, but sometimes even the normal people, not only the "Corporation are people, my friend" (M. Romney) get some discounts.

The tax deduction on mortgage interest comes as a tool to encourage Americans to own their homes. It is important, socially, for people to own their home to be independent, and in general contributes to the stability of the society. As anything, when taken to the extreme, it in fact achieves exactly the opposite, as we've seen in 2008, but when balanced - works well.

Capital gain is taxed in the US, because it is income. Generally, any income is taxed. However, gain sourced from the sale of primary residence is excluded, up to a certain (quite large) amount from this tax (if lived in the residence long enough - 3 of the last 5 years prior to sale). This, again, to encourage Americans to upgrade their houses and make it easier for Americans to relocate when needed (sell one house and buy another without losing cash on taxes).

As to "asset producing income" - that is true in the US as well. You cannot deduct your personal expenses, in general. Mortgage interest on primary residence is a notable exception, because it serves a social cause. Similarly, medical expenses are allowed as a deduction, if they're above certain limit, and many other things (for example - if a US person totals his car, and insurance doesn't cover the loss - it is tax deductible, above certain limit, the higher the income - the higher the limit). These are purely social policy breaks. Socialism, something Americans like to have, and love to hate.

Many "anti-socialists" in the US are in fact taking advantage of these specific tax breaks the most, because for rich folks these are limited or non-existent (mortgage interest limited up to 1 million, medical expenses are allowed only above certain percentage of income, etc).

share|improve this answer
    
+1 Very interesting littleadv. We have similar tax credits for medical expenses over $1500 per year. Also, if we have a house as our primary residence we can then rent it out for up to 6 years before selling it and still be exempt from paying CGT on it. –  Victor Oct 3 '12 at 7:26
    
Well, we only get 2 years to rent it out before we have to pay capital gains on sale:) But you got the general idea –  littleadv Oct 3 '12 at 7:27
    
@DilipSarwate, yes I have heard about the deferral if replacing the house with another one, but did not know it was only allowed once, and that capital losses from a personal residence could not be used to offset other gains. –  Victor Oct 3 '12 at 11:26
1  
Revised comment: Capital losses from the sale of a personal residence (which some people experienced in the last few years) are not deductible against other capital gains or income. –  Dilip Sarwate Oct 3 '12 at 20:58
1  
@Jeremy, what Americans see as "Socialism" and what Socialism really is are two distinct and unrelated things. Providing social safety net and encouraging population to improve its situation through tax policies is exactly what socialism is about. –  littleadv Oct 5 '12 at 17:07

Well quite a few countires have tax breaks on the first house you own ... this is typically to promote people to have atleast one house of their own ... having a house of your own provides lot more stability in the long run ... and without tax breaks it makes it difficult for quite a few to own a house ... the tax breaks form a motiviation as well ...

There are at times other effects of this breaks, people buying houses beyond their need [bigger house than required] or capacity [buying in a central / expensive location] by maximizing the breaks ...

share|improve this answer
    
Is it only for the first house you buy and not for subsequent houses? In Australia we have the First Home Owner's Grant, $7,000. During the GFC it was increased to $14,000 on existing houses and $21,000 for newly built houses. –  Victor Oct 3 '12 at 4:18
1  
@Victor there was a first time home buyer tax credit during the peak of the crisis (2008-2010), and in some states they have their own credits. This is unrelated. Mortgage interest is always deductible, if the mortgage is used to purchase or significantly improve your primary residence. –  littleadv Oct 3 '12 at 7:12

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.