A capital gains tax “holiday” would help boost the supply of more affordable homes and reduce market friction, according to the co-director of the American Enterprise Institute’s Housing Center.
Edward J. Pinto argues that if baby boomers didn’t have to pay a capital gains tax on the houses they’ve held for years, more would be willing to downsize into smaller properties, properties that do not compete with other buyers.
In calling for legislation exempting from the U.S income tax all capital gains on the sale of primary owner-occupied single-family homes owned for more than two years by someone 65 years or older, Pinto says such a measure would free up existing housing supply by incentivizing older owners who have held on to their homes because of the big capital taxes they face to finally sell.
“The capital gains lock-in is the propensity of individuals to postpone selling appreciated assets subject to capital gains taxes,” the co-head of the conservative think tank’s housing center says. “This lock-in is driven by the combination of an unindexed capital gains exemption on the sale of a home and the massive amount of consumer price inflation (CPI) and home price inflation (HPI) over the ensuing period.”
In most cases, Pinot maintains, “much of so-called capital gain actually represents gains due to inflation,” not in actual value. He cites two examples in which the related capital gains exclusions total about $100 billion per year, while gains actually recognized on home sales are relatively small at $6.5 billion per year.
Almost a third of all homeowners over the age of 65 exceed the single filer capital gains exclusion limit, Pinto points out in making the case for only a slight cost to the Treasury for his measure.
“Assuming these owners exceed the exclusion by an average of $200,000, this would represent $1.8 trillion in unrealized capital gains corresponding to an unrealized tax of say $270 billion at a 15% rate,” Pinto explains. “The $6.5 billion in annual capital gains actually realized only amounts to 2.4% of the unrealized tax.”
The AEI executive also suggested that roughly 3.8 million properties are two-owner homes with three or more bedrooms worth more than $500,000 in excess gains. The owners have lived in these homes 27 years on the median. They have a median living area of 2,300-square-feet with an average value of $1,153,000. He estimates, further, that their average gain in equity is $362,000.
