Abstract
Previous studies of owner-occupied housing typically ignore the taxation of capital gains because homeowners do not pay a capital gains tax if they buy up when they move. However, the capital gains tax code introduces a kink into the budget constraint of most previous homeowners, causing previous owners to face a different price of housing depending on whether they buy up or down. We control for the kinked budget constraint within a maximum likelihood model of owner-occupied housing demand. Results indicate that failure to model the capital gains tax provisions leads to inefficient estimates of the elasticities of demand. However, controlling for the kink did not lead to statistically different coefficient estimates relative to a linear budget constraint model.
Published Version
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