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April 01, 2008

Taxes and the housing bubble

Everyone is looking for answers as to why housing prices rose so sharply earlier this decade, but now those prices have peaked or have fallen in some markets. Could changes in a key part of the federal tax code have anything to do with the answer? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Many economists think, 'yes.' There was a major change in the tax code about 10 years ago, in 1997, that applied to the profits we make when we sell our home. Now, prior to that change, if you sold a house, in order to get a tax break on any of the profits you earned, you had to buy a house of equal or higher value. However, in 1997 Congress changed the law, and they said you can make up to $250,000 tax free if you're a single person, or $500,000 tax free if you're a couple from the sale of your house. And you didn't even need to buy another house. Furthermore, you could do that sale and make those profits tax free an unlimited number of times. So it's thought by economists that this stimulated a big rush to buy residential homes because of the big tax break. That contributed to the runup in housing prices and really set us up for the fall in the housing market that we're now seeing."

Posted by Dave at April 1, 2008 08:00 AM