Many older Americans, who have benefited from rising home values over recent years, are now facing an unexpected obstacle as they consider downsizing: a federal capital gains tax on profits from home sales. Initially aimed at targeting wealthy homeowners, this tax now impacts a broader spectrum of the population, creating financial concerns for middle-income individuals looking to sell their valuable properties.
Since 1997, the federal government has imposed capital gains taxes on home sale profits exceeding $250,000 for single filers and $500,000 for joint filers. This policy was initially designed to affect only the affluent. However, due to static thresholds and significant home value increases, a growing number of middle-income homeowners find themselves affected. As a result, many older homeowners, especially retirees or those nearing retirement, are reluctant to downsize, fearing the tax will deplete their vital savings.
The share of home sales subject to this tax has escalated, with CoreLogic reporting that 8% of U.S. sellers in 2023 made over $500,000 in profit, a steep rise from previous years. If the original threshold were adjusted for inflation, it would stand nearly twice as high today. Selma Hepp, CoreLogic’s chief economist, observed that many individuals feel financially ‘locked in’ because their home equity represents their primary savings.
David Levin, a retiree from Manhattan Beach, California, exemplifies this issue. He and his wife purchased their home in 1991 for $632,000, which is now valued around $2.8 million. Despite this equity growth, selling their property would incur substantial capital gains taxes, leaving them unable to afford a comparable residence nearby. Levin admits the irony, acknowledging their situation as a ‘wealthy problem,’ yet it underscores the broader challenge even well-off retirees face in maintaining their lifestyle within their established communities.
Legislative relief might be forthcoming. Rep. Jimmy Panetta has proposed a bill to double the capital gains tax exclusion to $500,000 for individuals and $1 million for couples, with adjustments for inflation. This initiative aims to encourage more homeowners to sell, thus increasing the housing supply and potentially easing affordability issues. Andrea S., another homeowner, is optimistic about this potential legislative change. Having bought her Los Angeles home for $245,000 in 1994, now valued at $1.3 million, she is strategizing around these proposed changes to maximize her retirement fund.
Stakeholders believe that raising and adjusting the tax thresholds could invigorate the housing market. It may allow older homeowners, like baby boomers, to transition more easily from large homes to smaller ones, thus freeing up inventory for younger families. This market shift is essential, as studies show that empty-nest boomers currently own twice as many homes with three or more bedrooms as younger, growing families.
The ongoing debate over the capital gains tax and its impact on home sales highlights a critical issue in the housing market, affecting a wide range of homeowners from various financial backgrounds. As policymakers consider adjustments to the tax code, the potential changes could offer significant relief and flexibility for those looking to downsize while maintaining financial security. The outcome of these proposed changes will be crucial for the future of housing dynamics in the country, potentially easing pressures for both sellers and buyers.
Source: Businessinsider
