Leverage and the Capital Gains Tax: An Exploration of a New Basis for Housing Taxation

• In Event: Property Tax Policies and Alternatives

Abstract

Housing is the largest asset class for U.S. households, yet current tax rules allow leveraged homeowners to exclude large capital gains while taxing only modestly and based on purchase price rather than equity invested. We develop an overlapping generations model to study an alternative policy: taxing gains relative to the homeowner’s initial equity. This equity-basis regime raises effective tax burdens on leveraged windfalls, reduces resale prices, and curbs speculative demand. Numerical steady-state results show that house prices become more affordable under the equity rule. The equity basis also improves tax progressivity, reduces unearned wealth accumulation, and enhances housing market efficiency.

Author

• Nathan Seegert, Northeastern University