Capital Gains Tax: Is Relief in Sight?

A Primary Impediment to Selling.

There are a variety of reasons why there are so few homes on the market to purchase, not only in San Carlos but all over the country. Three of the biggest reasons are high interest rates, property tax preservation, and the dreaded capital gains tax.

Interest rates are starting to come down, which will make the gap from post-pandemic free money to the current market rates a little less painful for those sellers who will have to exchange mortgages when they purchase their new place. And Proposition 19 now provides the ability for homes sellers 55 and older to preserve their existing property tax regardless of where they move in California

But the capital gains tax that most long-term homeowners must pay when they sell their home is still in place, and it's becoming an even larger obstacle for owners to sell their homes as home prices continue to increase. The higher that sales prices go, the bigger the capital gains tax liability will be. It's not uncommon at all for long time San Carlos homeowners to have to cut a hefty 6-figure check to the IRS when they sell their home.

Ouch.

The federal government has long allowed a certain amount of the profit that is garnered from the sale of a primary residence to be exempt from capital gains. For sole homeowners, that amount is $250,000 and for married couples it's $500,000. While this may seem like a generous exemption from a government that would rather see tax dollars flowing the other way, these figures have not been adjusted for inflation since they were introduced in 1997. So even with a half-million dollar tax break, many homeowners are balking at selling their homes because they simply don't want to write a huge check to the IRS for their profit — even AFTER the exemption is factored in.

Seeing that any sort of relief from capital gains could create more inventory and therefore more home sales, Rep. Jimmy Panetta has sponsored a bill that would adjust the current exemption for inflation and incentivize more home owners to sell.

The “More Homes on the Market” Bill.

H.R. 1321, better known as the “More Homes on the Market” bill, was introduced by Panetta last year and is currently working its way through the snail-trail that it takes to turn a bill into a law. Under Panetta's proposal, the homeowner's exemption from capital gains would double from its current values, meaning single homeowners would now be exempt for the first $500,000 of profit from their home sale, while married couples could protect $1,000,000. That is indeed a significant change.

The bill itself, which you can see the high level details here, already has 35 co-sponsors in Congress. That's the good news. The bad news is that the same site only gives it a 1% chance of becoming law.

Personally, I think this is a fabulous idea that is long overdue. I talk with potential home sellers every day, and capital gains liability is the #1 reason they are balking from selling their homes right now. Just think of how much more inventory we could generate if that obstacle was reduced by 50%.

What can you do? Email or call your congressman, and throw your support behind it. If the government is truly serious about getting more buyers into houses, this is an idea whose time has come.