December 19, 2008

Housing bubble has tax law behind it

The housing bubble behind the financial crisis and global economic downturn can be traced, in part, to a 1997 U.S. tax law, a recent study said.

The Federal Reserve study said that U.S. home sales over the past decade were 17 percent higher than they would have been without a capital gains tax break on home sales first proposed by President Bill Clinton during his 1996 reelection campaign, The New York Times reported Friday.

Nobel laureate Vernon Smith, an economics professor at George Mason University said the law, passed by Congress in 1997, fueled the mother of all housing bubbles.

The law exempted the first $500,000 in profits from a couple's home sale from taxes and the first $250,000 in gains from taxes for single filers.

When you give that big an incentive for people to buy and sell homes, they are going to buy and sell homes, said Ryan Wampler, a home builder from Phoenix, Ariz., who made $700,000 on the sale of three homes.

With the housing bubble's collapse, Wampler now says he owes $8 million and owns 80 acres outside of Phoenix that he cannot sell, the Times said.

I'm literally dying on the vine, he said.