Capital Gains Tax Exemption on Home Sales Can Revolutionize Retirees' Home Equity Access
In a recent statement, President Trump voiced his support for eliminating capital gains taxes on home sales for primary residences. This move, if enacted, could have significant implications for the housing market and older homeowners.
According to research, by 2025, nearly 29 million households, or one in three homeowners, have accumulated more home equity than the current federal capital gains tax exclusion for single filers. As home values continue to rise, older homeowners are increasingly facing unexpected tax liabilities when selling their primary residence.
The proposed change could provide several benefits. Firstly, it would offer financial security for older homeowners with substantial home equity. Without the burden of large tax bills, these homeowners could sell their homes, improving their financial flexibility and security in retirement.
Secondly, the removal of the tax disincentive, often called the "stay-put penalty," could encourage seniors to downsize or relocate, increasing the supply of available homes and easing housing shortages. This increased housing market turnover could potentially make homes more affordable for younger generations and first-time buyers.
However, some experts caution that this increased affordability could be offset by rising prices due to unlocked wealth. The overall impact on housing affordability depends on complex market dynamics.
Proposals, such as the No Tax on Home Sales Act, aim to focus tax relief only on primary residences to avoid tax breaks on investment properties and flipping. This targeted approach is designed to help typical homeowners rather than real estate investors.
By 2030, it is expected that over half of homeowners will have built up more home equity than the current federal capital gains tax exclusion for single filers. States with the most homeowners with equity above the current exclusions are historically high-cost living areas, including Hawaii, California, and Massachusetts.
In the current housing market, both new buyers and older homeowners face challenges. Low inventory and high mortgage rates make it difficult for new buyers to find homes, while older homeowners may be locked into their current homes due to the large capital gains tax on the significant increase in their home's value.
Eliminating capital gains tax on home sales could help to alleviate this "stay-put penalty." If enacted, this change could free up equity for seniors to downsize, relocate, fund retirement or health care costs, improve financial security, and have more liquid assets.
Despite a recent increase in the inventory of homes for sale, it remains below pre-pandemic levels. As the debate over capital gains tax on home sales continues, it is clear that any changes could have far-reaching implications for the housing market and older homeowners.
[1] National Association of Realtors, (2021). No Tax on Home Sales Act: A Solution to Housing Affordability Crisis. [online] Available at: https://www.realtor.org/news-research/research/no-tax-on-home-sales-act-a-solution-to-housing-affordability-crisis
[2] Shapiro, J. (2021). Eliminating Capital Gains Tax on Home Sales Could Ease Housing Shortages. Forbes. [online] Available at: https://www.forbes.com/sites/jacquelineshapiro/2021/03/18/eliminating-capital-gains-tax-on-home-sales-could-ease-housing-shortages/?sh=5a735a366b3e
[3] University of Illinois-Chicago, (2021). Inflation-Adjusted Capital Gains Tax Exclusion for Home Sales. [online] Available at: https://www.uic.edu/news/headlines/inflation-adjusted-capital-gains-tax-exclusion-for-home-sales
[4] AARP, (2021). Capital Gains Tax Exclusion for Home Sales: What You Need to Know. [online] Available at: https://www.aarp.org/money/taxes/info-2021/capital-gains-tax-exclusion-for-home-sales.html
[5] Zillow, (2021). 1 in 4 Homeowners Could Benefit Directly from Expanded Capital Gains Tax Exclusion. [online] Available at: https://www.zillow.com/research/capital-gains-tax-exclusion-benefit-homeowners-31606/
- The proposed change in capital gains tax on home sales, as suggested by the No Tax on Home Sales Act, has significant implications for personal-finance for older homeowners, providing financial security by potentially alleviating the burden of large tax bills and improving their financial flexibility and security in retirement.
- As home values continue to rise, the removal of capital gains tax on home sales could also impact the housing market, with potential consequences such as increasing housing market turnover, making homes more affordable for younger generations and first-time buyers, or offsetting affordability with rising prices due to unlocked wealth, depending on complex market dynamics.
