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

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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 andresidential property markets and discusses as well the magnitude of the imbalances. The methodused 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, socialrental dwellings, owner-occupied dwellings and private co-operative dwellings, which have drawndecisive 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 privateinvestors with regard to investments in rental residential properties. The owner-occupiers’ usercosts and subsidization are shown to depend on their capital structure and to a large extent theydepend on whether the owners’ most obvious savings alternatives are either personal investmentswith 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 theprospects of improved legal conditions for raising loans to finance the individual apartments willalmost certainly lead to this form of tenure – as "tax free ownership" – capturing part of themarket for owner occupation.

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Jens Lunde

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