By using the ZIP code level house price indices, I may have measured capital gains with errors. First, among homeowners with capital gains between $0 and $500,000, TRA97 increased the semiannual sales rate by 0.40–0.62 percentage points on average after TRA97, or 19–24% from the pre-TRA97 baseline levels. The short-term effect is particularly large, with the sales rate jumping 70–81% in the three years immediately after TRA97. Second, among homeowners with capital gains above $500,000, I do not find TRA97 to have a significant effect on home sales in the long-run, although the sales rate increased by 51% in the three years immediately after TRA97. Taken together, I find empirical evidence consistent with the theoretical prediction that housing capital gains taxation has a lock-in effect on homeowners. Even though house prices in the United States have dropped significantly since 2006, the economic impact of housing capital gains taxation is likely to remain important for three reasons.

Even renovations on previous homes often qualified, as long as people had deferred the tax in the past by buying a new house at least as valuable as their old one. 5The required two years of ownership and use during the five-year period ending on the date of the sale do not have to be continuous. In fact, one can even claim the capital gains exclusion on a second home, as long as the ownership and use tests are met. 4This one-time exclusion was $125,000 for both single filers and married joint filers. In addition, the exclusion could only be used once in a lifetime and no balance could be carried forward for a future sale. During the pre-TRA97 period, the Boston metropolitan area experienced a remarkable boom (mid 1980s) and bust (early 1990s).

The average semiannual house price appreciation rate after 1997 was 2% in real terms, which is significantly higher than the 1% before 1997. Consistent with the pattern shown in Figure 5, Table 3 indicates that only 1% of the pre-TRA97 observations have capital gains over $500K, whereas 26% of the post-TRA97 observations are in that category. Home sales rates of houses in different capital gains categories also changed notably after 1997. In particular, the sales rates of houses with negative capital gains or capital gains above $500K declined considerably, while the sales rates of houses with capital gains between $0 and $500K changed little after TRA97.

1. However, it should be noted that the exclusion applies to gain on the sale of the personal residence and not the rest of the farm.
2. Note that qualified disasters have a specific definition according to the IRS.
3. Special “educational IRAs” were created solely to pay qualified higher education expenses.
4. Prior to enactment of this law the Federal government was expected to take in more than $19.0 trillion over the same period.
5. This provision applies to farmers using the cash basis method of accounting and is retroactive to tax years after 1986.
6. “It was very hard for people to keep track of that information,” said Leslie B. Samuels, the assistant Treasury secretary for tax policy from 1993 to 1996.

Long-term gains, generally for assets held for more than 18 months, are taxed at a 20 percent rate (10 percent for individuals in the 15 percent regular tax bracket). The holding period for livestock held for draft, breeding, dairy and sporting purposes to qualify to be treated as a long-term capital gain continues to be more than 12 months (more than 24 months for cattle and horses). Thus, the proceeds from a producer’s sale of a sow that had been held for 17 months would be treated as capital gain but taxed at the lower of the producer’s regular tax rate or 28 percent. The vertical bars connect the maximum and minimum median values, and the circles indicate median prices averaged across the 26 ZIP codes. The average median house price increased from about $100,000 in 1982 to about $750,000 in 2008 in nominal terms. The age-55 rule allowed home sellers of age 55 or older to claim a one-time exclusion of $125,000 against their capital gains.

The Roth IRA will be a very attractive investment alternative for some people. 22The HPIs for the Cambridge-Newton-Framingham Metropolitan Division are also provided by Fiserv Lending Solutions. I tried to obtain the HPIs for the Boston-Quincy Metropolitan Division as well. However, the data are not available before 1985 for the Boston-Quincy Metropolitan Division. 20I use the AHS national sample because the Boston MSA sample was surveyed much less frequently.

Later, in Notice 97-13, the IRS allowed producers to follow previous procedures for the 1996 tax year but would have required AMT income adjustments in the 1997 to 2000 tax years. Farmers who included the proceeds from sales made in 1996 under deferred payment contracts for 1996 AMT income, or earlier years, and paid AMT should explore their refund possibilities. The Taxpayer Relief Act of 1997 played a vital role in shaping the tax landscape and providing relief to both individuals and businesses. By understanding the implications of this act, you can make informed decisions about your financial planning strategies and take advantage of the tax incentives it introduced.

“IRA Plus” Becomes “Roth IRA”

The deductible amount is phased out for single individuals with income beginning at $40,000 and $60,000 for joint returns. The deduction is allowable only for interest which must be paid on a qualified educational loan during the first 60 months in which interest payments tax relief act of 1997 are required. The interest deduction is not allowed for an individual who may be claimed as a dependent on another taxpayer’s return. Tax cuts and a balanced budget were negotiated by President Clinton and Congress in the Taxpayer Relief Act of 1997 (TRA ‘97).

When Did Roth IRAs Start?

These features of capital gains taxation may lead individuals to hold their assets for a longer time than they otherwise would. Economists have long recognized such a potential lock-in effect of capital gains taxation in financial markets. However, very few empirical studies have examined the lock-in effect of capital gains taxation in housing markets.

Table 4

Budget savings spanned Medicare and Medicaid to auctioning licenses and excise taxes. Additional spending from the year prior was mainly in individual welfare (children’s health insurance initiatives and welfare reform law). It’s also been suggested that because the government was receiving an influx of revenue—made possible by the marginal tax rate hikes of 1993 and growth in the nascent technology sector—cooperation on difficult budget issues became easier. The creation of these Roth accounts, and the conversion allowance in particular, provided an opportunity to expand IRA access without exploding the deficit—at least in the short term. While the government would receive additional income when people contributed to a Roth account or converted their traditional IRA to a Roth version, the Treasury would lose the revenue from withdrawals, which are generally tax free. Shortly after the Taxpayer Relief Act was passed, the Tax Foundation estimated that the IRA changes would result in $1.8 billion of revenue reduction in the first five years and a $20.2 billion reduction over 10 years.

This provision applies to farmers using the cash basis method of accounting and is retroactive to tax years after 1986. In 1996, the IRS had taken the position that producers selling commodities using a deferred payment contract https://turbo-tax.org/ could defer the income from the sale until the year of receipt of the proceeds for regular tax purposes. However, the proceeds would have needed to be included as income in the year of delivery of the commodity for AMT.

Overview of the Taxpayer Relief Act of 1997

The Taxpayer Relief Act of 1997 abolished the rollover rule and the age-55 rule, both of which imposed limitations on the tax benefits a taxpayer could receive upon selling their home. Instead, after the act, homeowners could exclude gains up to $250,000 if they were single filers and up to $500,000 if they were married filing joint filers, assuming the taxpayer met the criteria to exclude these gains. Parents of minor children benefited from the new child tax credit introduced by the act. The credit was introduced in 1998 at $400 per child under age 17 and increased to $500 in 1999.

In Table 7, I limit the sample to five-year windows and choose the mid-point to be the regime cutoff date. For example, the first column in the top panel uses 1991–95 observations and defines July 1, 1993 to be the cutoff date for a hypothetical regime change. Again, when the year 1997 falls outside the five-year window, the estimated coefficients are mostly small and insignificant. On the other hand, home sales rates of houses with positive capital gains increase the most when 1997 falls inside the five-year window. In summary, the above analysis predicts that TRA97 would weakly increase home sales rates among homeowners with positive gains up to the maximum exclusion amount. However, the effect of TRA97 on homeowners with capital gains above the maximum exclusion level is ambiguous in theory.