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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.
Effects of owner-occupancy
- Imputed rents disappear from measures of national income and output, unless figures are added to take them into account.
- The government loses the opportunity to tax the transaction. Sometimes governments have attempted to tax the imputed rent (Schedule A of United Kingdom's income tax 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.