The Baltimore Sun has a good article on why the Housing Bubble may have gained some inadvertent traction via changes in the tax code over the past 10 years. A worthy read.

The annual number of second homes purchased in the United States doubled between 2000 and 2004, according to new research. The boom is being driven in part by demographics – mainly a flood tide of equity-laden baby boomers – and in part by a largely unexpected ricochet effect of tax law changes in the late 1990s.

The latter factor was explained by Keunwon Chung, a statistical economist at the National Association of Realtors, who recently studied a vast pool of federal data on hundreds of thousands of second-home mortgage closings.

When Congress amended the federal tax code in 1997 to permit up to $500,000 (for married couples) and $250,000 (for singles) of gain on the sale of a primary home to be spared from taxation, observed Chung, “homeowners did not have to buy expensive [replacement] homes anymore.” Under prior law, the only way to avoid capital gains taxes was to roll over sales gains to progressively larger and costlier homes.

The amended tax code, by contrast, allows primary home sellers to buy a smaller, less expensive primary (replacement) residence while using a portion of the $500,000 or $250,000 tax-sheltered gain to buy or make a down payment on a second home – for use either as a recreational property or as an investment vehicle.

 Read the rest at baltimoresun.com.

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