A Call to Revamp I.R.C. §121: The Rules, the Reality, and a Path to Tax Parity for Long-Term Homeowners

Abstract

ABSTRACT The Taxpayer Relief Act of 1997 revolutionized how taxpayers reported and, when applicable, paid capital gains tax on the sale of their principal residences. We argue that I.R.C. §121 fails to provide tax parity for many U.S. taxpayers and does not adequately support myriad long-standing governmental initiatives that endorse homeownership. Specifically, it favors short-term homeownership and could substantially penalize homeowners who remain in their principal residence long term. We examine relevant taxation history and the realities that impede tax parity. We suggest modifications that can mitigate tax disparity associated with differences in holding periods and supplement these proposals by addressing tax-reducing provisions that are currently available to all principal residence owners. Our findings highlight a viable step toward mitigating the specific issue related to long-term homeowners as well as stressing that any resulting tax benefits deemed “excessive” for the nation’s wealthiest taxpayers should be dealt with outside of §121.