Taxation, User Cost, and Household Mobility Decisions

The tax subsidy to owner-occupied housing significantly impacts families’ decisions to move. When the subsidy is reduced, renters considerably delay their transition to homeownership and homeowners may be slightly less likely to trade up to a larger house. Higher capital gains tax rates discourage homeowners from moving to less expensive houses or changing status from owner to renter, but the effect is small. Therefore, reductions in capital gains tax rates such as those in the Taxpayer Relief Act of 1997 will not induce families to trade down if they would not otherwise have moved. After-tax income has a large effect on the decision to move, with increases in income leading families to move toward consuming more housing. Infrequent moving causes real housing consumption to adjust slowly to changes in the tax code. Thus the effect of any tax changes will take as much as eight to 10 years to be fully reflected in the housing market.