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Lack of balance in after-tax returns - lack of tenure neutrality. The Danish case

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  • Lunde, Jens

    (Department of Finance, Copenhagen Business School)

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    Abstract

    In Denmark, taxation of residential property returns varies considerably with the type of ownership and type of tenure in terms of the way income is calculated, the types of taxes applied and tax rates, which range from 0 % to above 60 %. Together with other housing subsidies this disparity in taxation contributes to the pronounced lack of tenure neutrality in the Danish housing market. The paper illustrates how tax rules alone create distortions and imbalances in the housing and residential property markets and discusses as well the magnitude of the imbalances. The method used is the application of a set of return and user cost equations. The tax aspects of the long-standing rather unequal treatment of private rental dwellings, social rental dwellings, owner-occupied dwellings and private co-operative dwellings, which have drawn decisive tracks in the markets, are discussed. The lowering of the tax rate for the return of institutional pension savings to 15 % which came into effect in 2001 has created a substantial advantage for pension funds compared with private investors with regard to investments in rental residential properties. The owner-occupiers’ user costs and subsidization are shown to depend on their capital structure and to a large extent they depend on whether the owners’ most obvious savings alternatives are either personal investments with heavily taxed returns or institutional pension savings with lightly taxed returns. Also private co-operative associations are tax exempted, and this fact in combination with the prospects of improved legal conditions for raising loans to finance the individual apartments will almost certainly lead to this form of tenure – as tax free ownership – capturing part of the market for owner occupation.

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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7154
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    Bibliographic Info

    Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2004-3.

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    Length: 35 pages
    Date of creation: 01 Jul 2004
    Date of revision:
    Handle: RePEc:hhs:cbsfin:2004_003

    Contact details of provider:
    Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
    Phone: +45 3815 3815
    Email:
    Web page: http://www.cbs.dk/departments/finance/
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    Related research

    Keywords: housing taxation; property taxation; property investment return; user costs; tenure neutrality; housing markets;

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