The Taxpayer Relief Act of 1997 and homeownership: Is smaller now better

U.S. Federal Income Tax Code prior to 1997 allowed homeowners to roll over capital gains taxation from the sale of a home if they bought up, that is, if they purchased another house within two years that was at least as expensive as their previous home. If a homeowner bought down, taxes were owed on the previous capital gain at the time of the sale. This made owning relatively cheaper than renting and provided incentives for movers to buy more expensive homes, thus distorting housing demand.;However, housing demand was only distorted for homeowners under age fifty-five, as homeowners over fifty-five were allowed a one time capital gains exclusion from the sale of a home up to ;Exploiting the fact that TRA97 differentially affects those over and under age fifty-five, using a difference-in-difference approach, allows identification of the law's effects on the housing market. Specifically, this allows me to see if homeowners who are no longer locked-in to their current level of housing consumption are moving down and if homeowners who no longer fear housing lock-in are moving up.;Using the American Housing Survey for the years 1995, 1996, 1998, 1999, 2002, 2003 and 2004, I find that homeowners affected by TRA97 are more likely move in 19981999 and more likely to move to a less expensive residence, which is consistent with this group no longer being locked-in. This effect seems to dissipate, as the same is not true in 2002–2004. In fact, I find some evidence that homeowners who are affected by TRA97 are moving up in 2002–2004, consistent with this group no longer fearing lock-in.;Keywords: Housing Demand, Residential Mobility, Capital Gains, Tax Reform, Lock-in.