APOA | Colin Allen
Sell your home AND keep all the profits? Sounds great, right?
There is a way to make this a reality: eliminate the taxes homeowners pay when they sell their homes.
Before 1997, homeowners could defer taxation on the sale of their primary residence by reinvesting their profits in another home. It required a decent amount of record-keeping to track one’s investment in the property. Those looking to move into a similar-cost or more expensive home typically benefited, while those looking to downsize paid taxes on anything not rolled into the new home.
Congress saw an opportunity to help homeowners.
By streamlining and modernizing the tax code, homeowners were allowed to keep tax-free gains of $250,000 for single filers and $500,000 for joint filers. Simple math: subtract what you paid for the home from what you sold the home for. Homeowners kept profits; there was no need to buy a more expensive home to avoid taxes and home sales were unlocked in the years following, especially for those longer-tenured owners looking to downsize.
Here we are, almost 30 years later and, like a lot of good things, the exclusion could use an update. Inflation and home price growth over the past three decades mean the value of the flat exclusion is about half what it was in 1997. Now, millions of homeowners—who were never intended to be taxed on their home sales—face big tax bills when selling their homes.
Congress again has an opportunity to act and a variety of new proposals look to address the issue.
The No Tax on Home Sales Act would eliminate the capital gains tax on a primary residence, bringing the United States tax law in line with many other countries that have a developed real estate market. According to the Organization for Economic Co-operation and Development (OECD), most member countries exempt capital gains on a primary residence.
The More Homes on the Market Act will propose raising the capital gains exclusions to what they would be if they had kept up with inflation—from $250,000 to $500,000 for single filers and from $500,000 to $1,000,000 for married couples filing jointly. Moving forward, those numbers would be indexed and allowed to increase as home prices rise.
What’s the benefit? The elimination of capital gains taxes on primary homes, or simply an increase in exclusions, is likely to encourage more homeowners to sell – especially those who have owned their homes for a long time and may be looking to downsize, retire and/or re-locate – which increases the supply of homes for sale on the market helping meet demand in many communities across the country.
Important note: We are talking about a benefit for individuals and families living in a home as their primary residence. These policies are not intended to be a boon for real estate investors.
The American Dream of homeownership is real, and the American Property Owners Alliance will continue to focus on common-sense policies that address affordability and supply issues and benefit the American homeowner.