A Fountain Valley woman has decided against selling her family home of 40 years, despite her desire to downsize and be closer to her children and grandchildren. The main reason? The prospect of a substantial capital gains tax on her property.
Capital gains taxes have become a concern for homeowners, even those residing in long-held suburban tract homes. Historically, homeowners were exempt from paying taxes on the gains from the sale of their primary residences, with single taxpayers being able to exclude up to $250,000 and married couples filing joint returns being able to exclude up to $500,000. However, skyrocketing home values have pushed more individuals into the tax bracket, as the exemptions have remained unchanged for 26 years.
For instance, the woman in question purchased her house for $125,000 in 1983, and it is currently valued at around $1.1 million. If she were to sell her home today, her accountant estimates that she would owe at least $104,000 in capital gains tax.
This issue has caught the attention of lawmakers and housing economists who believe that the capital gains tax is a barrier to homeowners selling their properties. It has contributed to a significant shortage of homes on the market in Southern California and is seen as a hindrance to addressing the housing crisis.
A bill currently in Congress aims to address this problem by doubling the amount of profit that is exempt from the capital gains tax. The bill, known as the “More Homes on the Market Act,” would increase the exclusion from $250,000 to $500,000 for single taxpayers, and from $500,000 to $1 million for married couples filing joint returns. The bill also proposes indexing the exclusion to inflation.
Currently, 27 co-sponsors from both parties support the bill, including Democratic Reps. Katie Porter and Ted Lieu, as well as GOP Reps. Mike Garcia and Michelle Steel. However, the bill is still in the committee stage, and the Congressional Budget Office has not conducted a cost analysis of doubling the exemption.
While some economists argue that low inventory levels are primarily due to high mortgage rates rather than the capital gains tax, others believe that the tax has a significant impact on the housing market. The California Association of Realtors estimates that just over 2.7 million homeowners in the state would be subject to the capital gains tax if they were to sell their homes today. If the bill were to pass, that number could be reduced to just over 1 million, leading to an increase in listings.
Despite differing opinions on the issue, it is clear that the capital gains tax is a factor that homeowners are taking into consideration when deciding whether to sell their homes. It remains to be seen whether the “More Homes on the Market Act” will gain traction and alleviate the burden of capital gains taxes for homeowners.
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