Accurate measurements of the time-dependent deformations of a building during earthquake excitation are essential for interpretation of the dynamic response of the as-built system and for quantifying the seismic demands. Traditional approaches for monitoring building systems are based on strong motion accelerometers mounted at selected elevations. However, accelerometer-based systems do not directly measure the deformations of the structure, and can have significant limitations that make it challenging to correctly measure deformations, particularly permanent deformations from inelastic response. In the study described herein, computational simulations and experiments were combined to evaluate the potential of a new optically based sensor to directly measure time-dependent deformations of a building, including inelastic deformations. The sensor methodology includes corrections for localized structural member rotations and can provide estimates of the absolute accelerations at each floor. A laser-based system utilizing a recently developed discrete diode position sensor (DDPS) is evaluated, and the ability of such a system to measure earthquake induced transient deformations characterized by building interstory drift is demonstrated.