Imputed rent
Encyclopedia
Imputed rent is the economic theory of imputation
applied to real estate
: that the value of a good is more a matter what the buyer is willing to pay than the cost the seller incurs to create it. In this case, market rents are used to estimate the value to the property owner. Thus, for example if one could rent a similar property for less than the costs, one is losing money on the deal and vice versa. While the idea of imputed rent applies to any capital good, it is most commonly used in reference to home ownership.
More formally, in owner-occupancy
, the landlord
-tenant
relationship is short-circuited. Consider a model: two people, A and B, each of whom owns property. If A lives in B's property, and B lives in A's, two financial transactions take place: each pays rent to the other. But if A and B are both owner occupiers, no money changes hands even though the same economic relationships exists; there are still two owners and two occupiers, but the transactions between them no longer go through the market
. The amount that would have changed hands had the owner and occupier been different persons is called the imputed rent.
In population datasets like the CNEF imputed rent is estimated:
Imputation (economics)
In economics, the theory of imputation, first expounded by Carl Menger, maintains that factor prices are determined by output prices.This is the opposite of the labor theory of value maintained by classical economists such as Adam Smith and David Ricardo....
applied to real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
: that the value of a good is more a matter what the buyer is willing to pay than the cost the seller incurs to create it. In this case, market rents are used to estimate the value to the property owner. Thus, for example if one could rent a similar property for less than the costs, one is losing money on the deal and vice versa. While the idea of imputed rent applies to any capital good, it is most commonly used in reference to home ownership.
More formally, in owner-occupancy
Owner-occupier
An owner-occupier is a person who lives in and owns the same home. It is a type of housing tenure. The home of the owner-occupier may be, for example, a house, apartment, condominium, or a housing cooperative...
, the landlord
Landlord
A landlord is the owner of a house, apartment, condominium, or real estate which is rented or leased to an individual or business, who is called a tenant . When a juristic person is in this position, the term landlord is used. Other terms include lessor and owner...
-tenant
Leasehold estate
A leasehold estate is an ownership of a temporary right to land or property in which a lessee or a tenant holds rights of real property by some form of title from a lessor or landlord....
relationship is short-circuited. Consider a model: two people, A and B, each of whom owns property. If A lives in B's property, and B lives in A's, two financial transactions take place: each pays rent to the other. But if A and B are both owner occupiers, no money changes hands even though the same economic relationships exists; there are still two owners and two occupiers, but the transactions between them no longer go through the market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
. The amount that would have changed hands had the owner and occupier been different persons is called the imputed rent.
Effects of owner-occupancy
- Imputed rents disappear from measures of national income and outputMeasures of national income and outputA variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product , gross national product , and net national income . All are specially concerned with counting the total amount of goods and...
, unless figures are added to take them into account. - The governmentGovernmentGovernment refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
loses the opportunity to taxTaxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
the transaction. Sometimes governments have attempted to tax the imputed rent (Schedule A of United KingdomUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
's income taxIncome taxAn income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
used to do this), but this tends to be unpopular.
In population datasets like the CNEF imputed rent is estimated:
- for owner-occupiers, as a small percentage (4-6%) of the capital accrued in the property.
- for public housing tenants, as the difference between rent paid and the average rent for a similar property in the same location.
- for those living rent-free, as the estimate of the rent they would have to pay to rent a similar property in the same location.
- for renters in the private market, imputed rent is zero.