Horizontaland Vertical Inequities in the Capital Gains Taxation of Owner-Occupied Housing

Abstract

This article examines the capital gains tax inequities of owner-occupied housing caused by below-market financing techniques. Several recent studies have shown that the capitalized financing premium associated with below-market financing arrangements tends to show that the homeowner purchased a more expensive home than he or she actually did. For homeowners who would otherwise downsize to lower-valued houses (and thus be liable for capital gains taxes), the higher reported purchase price lowers the taxable gain in the year of sale and creates potential horizontal and vertical inequities in the taxation of capital gains of owner-occupied. The evidence suggests that the aggregate capital gains tax savings from assumption financing techniques is likely to be around $60 million per year.