Economy killing home tax break, redux

It's good to see the New York Times finally caught up. In today's edition, the paper looks at how a Tax Break May Have Helped Cause Housing Bubble.

It's a comprehensive review of the same topic blogged about here on Don't Mess With Taxes back in September in Did the home sale tax exclusion kill the economy?

You know the tax break that I talked about months ago and the Times examines today. It's the exclusion from taxable income of large amounts of profit reaped on the sale of a principal residence. Single filers can shield up to $250,000 from the IRS; file jointly and you get double the tax exclusion.

A break not offered elsewhere: The upshot of both the Times' article and the studies I cited in my earlier blog post is that the generous home sale tax exclusion law likely helped fuel the run up in property values.

Since real estate got this tax benefit not afforded other property such as stocks, housing became the hot investment. And our capitalist system soon began, at least in this sector and much to the belatedly admitted shock of former Fed Head Alan Greenspan, to run amok.

Of course, few things in life are cut and dried, so it's irresponsible to point fingers (your choice of digit) at just the tax code's influence on the housing market. But it certainly is a factor that can't be ignored.

The touting of home tax breaks: For decades, every lender and real estate agent has touted the tax benefits of owning a home and buyers have rationalized over spending on a residence by parroting the tax code breaks.

And in many, many cases everybody has come out just fine under the current arrangement. So, as the adage goes, we need to be careful about throwing out the baby with the bath water.

Who knows, given Capitol Hill's penchant for tweaking tax laws, there may one day be a refinement of this tax break. Earlier this year, lawmakers decided that the home sale's work-around application to second home offered a bit too much of a tax break. Beginning Jan. 1, 2009, a "Sold!" sign on additional real estate will cost the sellers more.

I doubt the primary residence sale exclusion will ever be rescinded, but we might one day see it made a bit more difficult, perhaps by requiring a longer occupancy time before reaping hundreds of throusands in nontaxed profits