The Taxpayer Relief Act of 1997 and Homeownership: Is Smaller Now Better?

Abstract

Prior to 1997, homeowners under 55 were allowed to defer capital gains taxes from a home sale if they bought another house at least as expensive, while those over 55 received a capital gains exclusion regardless of the cost of their new home. The Taxpayer Relief Act of 1997 (TRA97) eliminated this differential tax treatment. We exploit the differential treatment before 1997 to uncover TRA97’s effects. Comparing homeowners under 55 before and after 1997, we find that those who moved after 1997 are twice as likely as to list “seeking less expensive housing” as a reason for moving, 8 percent less likely to own their residences and 9 percent less likely to live in a single family home.