Tax Lawyer's Blog

In 1997 President Clinton signed into law a bill that entirely eliminated the capital gains tax on profits of $500,000.00 or less on the sale of most homes.

Now, some economists are saying that the sale-of-residence capital gain exclusion was a significant contributing factor in creating the housing bubble the New York Times reports in Tax Break Have Helped Cause Housing Bubble.

The different tax treatments gave people a new incentive to plow ever more money into real estate, and they did so. “When you give that big an incentive for people to buy and sell homes,” said Mr. Wampler, 44, a mild-mannered native of Phoenix who has two children, “they are going to buy and sell homes.”

While the economists admit that the residential tax break was not the only cause of the housing bubble citing “a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall,” they still contend that the law had a significant impact by “allowing home sales to become tax-free windfalls.”

 A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.

Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for “fueling the mother of all housing bubbles.”

By favoring real estate, the tax code pushed many Americans to begin thinking of their houses more as an investment than as a place to live. It helped change the national conversation about housing. Not only did real estate look like a can’t-miss investment for much of the last decade, it was also a tax-free one.

Author’s Observations:

The entire purpose of the housing tax break was to incentivize home ownership. 

Thus, when economists say that the 1997 housing tax breaks caused more people to buy residences they deserve about as much applause as would a farming expert who pointed out that the planting of more corn kernels was the cause of more corn.

Well, duh!

But I am most surprised by this comment from former IRS Commissioner (and current Monday Morning Quarterback), Charles Rossotti:

Why insist in effect that they put it in housing to get that benefit? Why not let them invest in other things that might be more productive, like stocks and bonds?

It is amazing that Mr. Rossotti doesn’t seem to recognize that there were significant non-financial reasons for the government to encourage people to own rather than lease their homes.

Just a few minutes of research yields the following:

Owning a Home is Good for You . . . and Society – U.S. News & Word Report – Kids to better, communities prosper and its healthier.

The children of owners are more likely to graduate from high school than the children of renters. Home ownership gives individuals an incentive to invest in their local communities.

Owners are more likely to vote in local elections, attend church, volunteer, and join nonprofessional organizations.

There is some evidence that homeowners report higher self-esteem and happiness than renters and even better physical health. “Homeowners tend to stay put longer, so they create more friendships and associations in the local neighborhood,” says William Rohe, professor of city and regional planning at the University of North Carolina.

Everyone Benefits from Home Ownership - Irwin Seltzer, Telegraph.co.uk.

My own studies in America show that increased home ownership is associated with lower crime rates, higher levels of educational attainment and greater civic involvement, and I see no reason to believe the same is not true in Britain.

The truth is that in 1997 everyone believed that increasing home ownership was a good thing for American society.

Bookmark & Share: