Capital Gains Tax & Housing: Why It Won’t Solve the Problem
Potential Capital Gains Tax Changes Coudl Stir Up the Housing Market
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Changes to the capital gains tax on home sales are being debated, potentially impacting the housing market and homeowners across the country. Currently, individuals can exclude up to $250,000 in profits from the sale of a primary residence, and couples can exclude up to $500,000. Proposed changes could significantly alter these exemptions, leading to both increased tax revenue and shifts in housing supply and demand.
How Changes to the Capital Gains tax Could Impact Homeowners
A reduction in the capital gains exemption could impact a significant number of homeowners, particularly those who have owned their homes for a long period and seen substantial gratitude.Yun noted that many retirees are hesitant to downsize due to the potential tax implications of selling their homes.
“If the exemption amount, we would see potentially a good portion of those listing,” Yun stated.The current tax applies to profits exceeding $250,000 for individuals and $500,000 for couples. The tax is calculated on the difference between the original purchase price and the sale price,minus any qualified improvements made to the property.Most homeowners affected would be those in the higher price brackets. According to the National Association of Realtors (NAR), the median home price in June was $435,300. During that same month, 17% of homes sold were priced above $750,000, putting those sellers at risk of owing capital gains taxes.
Who Would Be Most Affected?
The impact of a reduced exemption wouldn’t be felt equally across the market.
High-End Homeowners: Those selling properties valued well above the current exemption levels would be most directly affected.
Long-Term Homeowners (Baby Boomers): Individuals who have owned their homes for decades, particularly Baby Boomers, have likely accumulated significant equity, making them vulnerable to the tax. Many are considering downsizing, but the tax implications are a deterrent.
Those in High-Appreciation Markets: homeowners in areas that have experienced substantial price increases since the pandemic began are more likely to exceed the exemption limits. Home prices have risen roughly 52% nationally in the past five years.
However, those on the lower end of the market are less likely to be impacted, as their gains typically fall below the existing exemption thresholds.
Beyond Taxes: Confidence and Housing market Dynamics
While a change in the capital gains tax could influence the market, some experts believe other factors are more critical. Stephen Kim, a housing analyst at Evercore ISI, emphasized the importance of restoring confidence in the market.
“What’s really going to matter is a return of confidence. We believe that a lot of the actions that the Trump administration has taken has created instability and uncertainty, and people who are going to make the biggest purchase of their life, they don’t like to have any kind of insecurity or uncertainty,” Kim explained on CNBC’s “Closing Bell Overtime.”
Could Reducing the Tax Actually Keep People in Their Homes?
Interestingly, some experts suggest reducing the capital gains tax might not necessarily increase housing supply.Redfin Chief Economist Daryl Fairweather proposes that the current system incentivizes some homeowners to sell before* their gains exceed the exemption limit. Lowering the tax could encourage them to stay in their homes longer.
“It’s not clear to me this would help the housing market. If anything, I would like to see them reduce taxes on improvements to homes, like if you’re putting in an ADU, and that’s what increases the value of your home,” Fairweather said on CNBC’s “Fast Money.” This suggests a focus on incentivizing home improvements, rather than sales, could be a more effective strategy for stimulating the housing market.