The New York Times comes out with an article stating what must be obvious to just about everyone, from Presidents, past, present, and future, to your Regular Joe getting his pink slip three days before Christmas.

The article is about changes to the US federal tax law that made it more appealing (i.e., lucrative) for people to sell their homes, over and over again.

Before 1997, people had to buy a house that was at least as valuable as their previous one to avoid the [capital gains] tax, or else take [a] one-time exemption.

A law passed during the Clinton(2) administration changed that.

The provision — part of a sprawling bill called the Taxpayer Relief Act of 1997 — exempted most home sales from capital-gains taxes. The first $500,000 in gains from any home sale was exempt from taxes for a married couple, as long as they had lived in the home for at least two of the previous five years. (For singles, the first $250,000 was exempt.)

I remember reading a quote from Woody Allen saying he has made more money from real estate than he ever did from his movies. (No catty remarks about “Melinda, Melinda”, please.)

The capital gains exemption had an effect on more than just home prices, of course. By freeing up vast amounts of money, it fueled consumer consumption. Which of course, was unsustainable. Which of course, is what we’re seeing the results of, right now. (Well, not right now, I’m actually shopping for big-screen TVs.)

It’s not clear what effect the 1997 tax law had on the number of home sales each year. It seems to me that people became more mobile following the passing of the law. There were no limitations on the number of times you could use the exemption. Because of low-low interest rates, demand skyrocketed. With supply limited, prices took a jump.

Source: The Reckoning – By Vikas Bajaj and David Leonhardt

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