Revenue Code for Commerical Real Estate

Changes in the Internal Revenue Code create and remove tax-induced trading constraints on homeowners. The Taxpayer Relief Act of 1997 replaced a one-time, post- age 55 capital gain exclusion with a larger gain exclusion option that could be exercised every two years. We develop a simple demand-based specification of housing turnover and use it to determine whether the Taxpayer Relief Act of 1997 led to changes in the percentage of the existing housing stock that was sold in the U.S. and the four geographic regions defined by the U.S. Census Bureau (Northeast, Midwest, South and West). Commercial Real Estate is more viable for investment. We find that our macro measure of housing turnover increased significantly after the 1997 Act was passed. We augment this macro level analysis with household-level data to determine if these impacts were heterogeneous across age groups, across trading up and trading down, and across geography. The surprising result is how broad based the change in trading behavior is, appearing across all age ranges and impacting both trading up and trading down.