Cap Gains Tax Called ‘Stay Put’ Penalty
Calls grow to reform tax law NAR says is ‘stifling market turnover, squeezing supply, and driving up prices’ of homes
Homeowners are sitting on billions in equity. But they’re also sitting on a boatload of tax liability, which is just one more reason many are reluctant to put their homes on the market.
According to a new report, nearly 29 million U.S. homeowners — a third of the total — could face federal capital gains taxes over the $250,000 exclusion for single taxpayers if they sold today. More than eight million, or one in 10, have equity that exceeds the $500,000 cap for joint filers.
And sellers will face an even larger tax hit in the future, the report from the National Association of Realtors (NAR) shows.
In just five years, 47 million homeowners — a whopping 56% — will hit the $250k threshold, and nearly 20 million, almost one in four, will exceed $500k, the report estimates. By 2030, 40% of all owners in eight states will have equity above the $500k threshold.
And in 10 years, 59 million owners — 70% of the total — will have equity above the $250k cap, and 38% will be above the $500k ceiling.
“Many delay downsizing or relocating because they fear both the tax and the cost of buying again.” —National Association of Realtors report
NAR, an influential trade group representing realty agents and brokers, is calling for lawmakers in Washington to double the capital gains exclusion to $500,000 for individuals and $1 million for married couples.
The group also wants the thresholds adjusted on an annual basis to “close to where they would be” if indexed to inflation since 1997, when they were last increased. “The exclusion has never been adjusted for inflation,” the organization points out.
Rep. Marjorie Taylor Greene (R-GA) has introduced a bill called the “No Tax On Home Sales Act” that would go further by eliminating the capital gains tax on primary residences altogether. And President Trump is considering doing the same: “We’re thinking about that,” he said from the Oval Office.
Calling the current tax law a “stay put” penalty, NAR says a capital gains “tax cliff” is coming that will hit middle-class owners “hard.” Homeowners, the organization adds, “are facing a looming tax penalty simply for staying in their homes too long.”
The trade group argues that the “outdated” thresholds “already are distorting the housing market and locking up inventory.” Further, NAR contends, “it is getting worse every year.”
Seniors in appreciating markets are especially locked in because they face a severe tax liability should they sell. They “often can’t afford to sell because they’d be hit with unexpected tax bills simply for building equity over time,” according to the report. “Many delay downsizing or relocating because they fear both the tax and the cost of buying again.”
“This is stifling market turnover, squeezing supply, and driving up prices for younger buyers,” NAR maintains.
At one time, the tax exclusion was “generous,” NAR admits. But over the past 28 years, it points out, rising home values have “eroded” its value, especially for people who have owned their homes for two decades or longer.
More and more older owners who are considering a move face gains “well in excess of the exclusions,” leaving them facing tax bites that reduce their ability to afford a new place. When they decide to stay put, it limits the number of houses on the market, causing first-time buyers to face more competition and higher prices.
“Increasing the exclusion and indexing it for future inflation removes this disincentive for homeowners to sell, unlocking a segment of inventory previously unavailable to prospective buyers,” NAR is telling lawmakers. “Building equity shouldn’t come with a penalty — it should come with opportunity.”