Fear of the concealed property value tax looms large
Rising Capital Gains Tax Concerns for Home Sellers
The National Association of Realtors (NAR) has sounded the alarm as soaring home prices cause many homeowners to surpass the exclusion limits for federal capital gains tax on the sale of their primary residence. This issue, which has not been addressed in nearly three decades, could lead to a significant tax burden for homeowners in expensive housing markets.
The current impact of capital gains taxes on home sales is that homeowners can exclude up to $250,000 of profit ($500,000 for married couples) from federal capital gains tax if they meet IRS criteria. However, because the exclusion limits have not been adjusted for inflation since 1997, many homeowners are now facing taxable gains due to soaring home prices.
Those most at risk of incurring significant capital gains tax bills are long-time homeowners in expensive housing markets who have seen large appreciation in their home values. For example, a homeowner in a high-price area like San Francisco who bought decades ago and now has $700,000 in gains would have tens of thousands of dollars in tax liability on the amount exceeding the exclusion. Roughly one-third of US homeowners—about 29 million people—are near or above the exclusion limits and could face this "capital gains cliff," with even more projected to by 2030. This group includes many older Americans looking to downsize and wealthier sellers in elevated-price markets.
The debate continues whether removing or raising exclusion limits would improve housing market fluidity or worsen affordability issues. Some financial experts are skeptical about the benefits of eliminating a capital gains tax, as it would primarily benefit wealthier, higher-income, and older homeowners. Members of Congress, including Rep. Marjorie Taylor Greene (R-Ga.) and Rep. Jimmy Panetta (D-CA), have proposed eliminating capital gains taxes or at least raising the home-sale exclusion amounts.
For those below the exclusion thresholds, capital gains tax is unlikely or minimal, especially with preferential long-term capital gains rates applying. However, homeowners can take steps to mitigate their taxable gains, such as significant upgrades like a new kitchen, an added bathroom, or finishing the basement, which can increase a home's cost basis, lowering the taxable profit.
Additionally, a flexible Home Equity Line of Credit (HELOC) can help homeowners put their equity to use and keep financial options open. By understanding the potential impact of capital gains taxes on their home sales, homeowners can make informed decisions about their financial future.
References:
- NAR Report on Capital Gains Tax
- IRS Capital Gains Tax Information
- Brookings Institute Analysis on Capital Gains Tax
- CNBC Article on Capital Gains Tax and Housing Market
- Realtor.com Article on Hidden Home Equity Tax
Personal-finance implications for home sellers escalate as rising home prices push many to surpass the federal capital gains tax exclusion limits, resulting in a potential high tax burden. In expensive housing markets, homeowners who have experienced significant appreciation in their home values might face substantial capital gains tax bills, especially if they exceed the current exclusion limits of $250,000 ($500,000 for married couples).
