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Taxation of capital gains on owner-occupied homes

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  • Englund, Peter
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    Abstract

    The paper compares taxation on realization with taxation on accrual in the context of owner-occupied housing. It considers a model where the utility a household derives from housing relative to other consumption varies over the life-cycle. As there are sizeable transaction costs, housing consumption will not, even in the absence of taxes, be adjusted continuously but at discrete intervals. The focus of the paper is on tax effects on the length of these intervals. The following results are shown:uTaxing ‘true economic appreciation’ at the same rate as imputed rental income and other capital income will lead to a shortening of the intervals.If the capital gains are taxed on accrual, an increase in this tax rate holding other rates constant will lead to a shortening of the intervals.If the capital gains are taxed only as they are realized, an increase in this tax rate holding other rates constant may either lead to a lengthening or a shortening of the holding period. Shortening is more likely if transaction costs are large, whereas lengthening will occur if the rate of price increase is high.

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    Bibliographic Info

    Article provided by Elsevier in its journal European Economic Review.

    Volume (Year): 27 (1985)
    Issue (Month): 3 ()
    Pages: 311-334

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    Handle: RePEc:eee:eecrev:v:27:y:1985:i:3:p:311-334

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    Web page: http://www.elsevier.com/locate/eer

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    References

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    1. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
    2. Artle, Roland & Varaiya, Pravin, 1978. "Life cycle consumption and homeownership," Journal of Economic Theory, Elsevier, vol. 18(1), pages 38-58, June.
    3. Samuelson, Paul A, 1976. "Economics of Forestry in an Evolving Society," Economic Inquiry, Western Economic Association International, vol. 14(4), pages 466-92, December.
    4. Green, Jerry R & Sheshinski, Eytan, 1978. "Optimal Capital-Gains Taxation under Limited Information," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1143-58, December.
    5. Feldstein, Martin & Slemrod, Joel & Yitzhaki, Shlomo, 1980. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 777-91, June.
    6. Bo Sandelin, 1981. "Price Behavior and Capital Gains on Residential Real Estate: The Case of Sweden," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 9(3), pages 241-264.
    7. Kovenock, Daniel J. & Rothschild, Michael, 1983. "Capital gains taxation in an economy with an `Austrian sector'," Journal of Public Economics, Elsevier, vol. 21(2), pages 215-256, July.
    8. Stiglitz, Joseph E., 1983. "Some aspects of the taxation of capital gains," Journal of Public Economics, Elsevier, vol. 21(2), pages 257-294, July.
    9. Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72, pages 604.
    10. Diamond, P. A., 1975. "Inflation and the comprehensive tax base," Journal of Public Economics, Elsevier, vol. 4(3), pages 227-244, August.
    11. Lippman, Steven A. & McCall, John J., 1981. "Progressive taxation in sequential decisionmaking : Deterministic and stochastic analysis," Journal of Public Economics, Elsevier, vol. 16(1), pages 35-52, August.
    12. Feldstein, Martin & Yitzhaki, Shlomo, 1978. "The effects of the capital gains tax on the selling and switching of common stock," Journal of Public Economics, Elsevier, vol. 9(1), pages 17-36, February.
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    Cited by:
    1. Khalid Sekkat & Ariane Szafarz, 2011. "Valuing Homeownership," The Journal of Real Estate Finance and Economics, Springer, vol. 43(4), pages 491-504, November.
    2. Nicole Aregger & Martin Brown & Enzo Rossi, 2013. "Transaction Taxes, Capital Gains Taxes and House Prices," Working Papers 2013-02, Swiss National Bank.
    3. Jos van Ommeren & Michiel van Leuvensteijn, 2002. "New Evidence of the Effect of Transaction Costs on Residential Mobility," Tinbergen Institute Discussion Papers 02-117/3, Tinbergen Institute.

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