Response to Housing Price Surge: Lawmakers Mull Expanding Capital Gains Tax Exemptions
A congressional bill is aiming to address the growing issue of capital gains tax hindering homeowners from selling their properties. The bill seeks to double the exclusions from capital gains tax, potentially making it more appealing for homeowners to downsize or move.
One homeowner in Fountain Valley, who wishes to remain anonymous, illustrates the dilemma many homeowners face. Despite wanting to downsize and move closer to her family, she’s reluctant to sell her home due to the substantial capital gains tax liability she would incur. The current tax rules allow for exclusions of up to $250,000 for single taxpayers and $500,000 for married couples filing joint returns. However, these limits have remained unchanged for 26 years, while home values have soared.
Skyrocketing home prices across the country have exposed more homeowners to capital gains tax when selling their primary residences. For instance, the median house price in the U.S. has tripled to $407,100 since the exclusion limits were set in 1997. In California, the median home price has increased five-fold to $859,500.
The homeowner in question, who bought her house for $125,000 in 1983 and now values it at around $1.1 million, could potentially face a capital gains tax of at least $104,000 if she were to sell today. This tax burden discourages many homeowners like her from selling, contributing to a shortage of available homes on the market, particularly in Southern California.
To address this issue, a bill in Congress, called the “More Homes on the Market Act,” is being considered. The bill aims to double the capital gains exclusion, increasing it to $500,000 for single filers and $1 million for married couples filing jointly. Additionally, it proposes indexing the exclusion to inflation to keep pace with rising home prices.
The bill has garnered support from lawmakers from both parties, including Rep. Jimmy Panetta and Rep. Mike Kelly, and is seen as a potential solution to the housing shortage problem. It is designed to benefit homeowners who have lived in their primary residence for at least two of the last five years, rather than investors or flippers. While the bill is promising, it has yet to be reported out of committee, and its potential cost to the U.S. Treasury remains undetermined.
