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The effect of capital gains taxation on home sales: evidence from the Taxpayer Relief Act of 1997

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  • Hui Shan
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Abstract

The Taxpayer Relief Act of 1997 (TRA97) significantly changed the tax treatment of housing capital gains in the United States. Before 1997, homeowners were subject to capital gains taxation when they sold their houses unless they purchased replacement homes of equal or greater value. Since 1997, homeowners can exclude $500,000 of capital gains when they sell their houses. Such drastic changes provide a good opportunity to study the lock-in effect of capital gains taxation on home sales. Using ZIP-code level housing price indexes and sales on single-family houses data from 1982 to 2006 in 16 affluent towns within the Boston metropolitan area, this paper finds that TRA97 reversed the lock-in effect of capital gains taxes on houses with low and moderate capital gains. However, TRA97 may have generated an unintended lock-in effect on houses with capital gains over the maximum exclusion amount. In addition, this paper exploits legislative changes in capital gains tax rate to estimate the tax elasticity of home sales during the post-TRA97 period.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-53.

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Date of creation: 2008
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Handle: RePEc:fip:fedgfe:2008-53

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Keywords: Real property and taxation ; Capital gains tax;

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  1. Zhonglan Dai & Edward Maydew & Douglas A. Shackelford & Harold H. Zhang, 2008. "Capital Gains Taxes and Asset Prices: Capitalization or Lock-in?," Journal of Finance, American Finance Association, vol. 63(2), pages 709-742, 04.
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  3. Mervyn A. King, 1980. "An econometric model of tenure choice and demand for housing as a joint decision," NBER Chapters, in: Econometric Studies in Public Finance, pages 137-159 National Bureau of Economic Research, Inc.
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  6. Robert J. Shiller & Karl E. Case, 1988. "The Behavior of Home Buyers in Boom and Post-Boom Markets," Cowles Foundation Discussion Papers 890, Cowles Foundation for Research in Economics, Yale University.
  7. Katherine A. Kiel & Jeffrey E. Zabel, 1999. "The Accuracy of Owner-Provided House Values: The 1978-1991 American Housing Survey," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(2), pages 263-298.
  8. Cunningham, Christopher R. & Engelhardt, Gary V., 2008. "Housing capital-gains taxation and homeowner mobility: Evidence from the Taxpayer Relief Act of 1997," Journal of Urban Economics, Elsevier, vol. 63(3), pages 803-815, May.
  9. William H. Hoyt & Stuart S. Rosenthal, 1989. "Capital gains taxation and the demand for owner-occupied housing," Working Paper Series / Economic Activity Section 92, Board of Governors of the Federal Reserve System (U.S.).
  10. Amelia M. Biehl & William Hoyt, 2009. "The Taxpayer Relief Act of 1997 and Homeownership: Is Smaller Now Better?," Working Papers 2009-04, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  11. Todd Sinai, 1997. "Taxation, User Cost, and Household Mobility Decisions," Zell/Lurie Center Working Papers 303, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  12. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, vol. 99(4), pages 729-52, November.
  13. Goodman, John Jr. & Ittner, John B., 1992. "The accuracy of home owners' estimates of house value," Journal of Housing Economics, Elsevier, vol. 2(4), pages 339-357, December.
  14. Sandra J. Newman & James D. Reschovsky, 1987. "Federal policy and the mobility of older homeowners," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 6(3), pages 402-416.
  15. King, Mervyn A., 1980. "An econometric model of tenure choice and demand for housing as a joint decision," Journal of Public Economics, Elsevier, vol. 14(2), pages 137-159, October.
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Cited by:
  1. Christian A. L. Hilber & Tracy M. Turner, 2013. "The mortgage interest deduction and its impact on homeownership decisions," LSE Research Online Documents on Economics 49843, London School of Economics and Political Science, LSE Library.

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