Tax Burden Drives Boomers to Hold Homes for Inheritance

A growing number of older homeowners are choosing to retain their properties rather than sell them, largely due to the capital gains tax implications. Many baby boomers, including Duane Flemming and his wife, Chris Currie, are opting to stay in their homes to enable their children to inherit them without a tax burden. This trend is part of a broader examination of wealth transfer dynamics in the series “The Great Transfer.”

Flemming, an 81-year-old retired veterinarian, has lived in his four-bedroom home in a suburb east of San Francisco for over four decades. He and Currie are considering downsizing, but the couple is deterred by the significant capital gains taxes they would incur from a sale. “We don’t use three-quarters of the rooms we’ve got,” Flemming stated. “We would love to be able to get rid of it in an easy fashion, without having all of those huge expenses that are going to cost us down the line.”

Since 1997, homeowners selling properties with profits exceeding $500,000 for married couples or $250,000 for single filers have faced federal capital gains taxes. These taxes can reach as high as 20%, influenced by the seller’s income, and do not account for potential state taxes. Flemming estimates that his home has appreciated by approximately $800,000, suggesting a tax burden of between $30,000 and $60,000 upon sale. He fears that this financial hit would limit their ability to secure a new home and manage escalating long-term care costs.

The implications of capital gains taxes are becoming increasingly significant. According to a report by the National Association of Realtors in 2025, about 34% of homeowners in the United States could surpass the $250,000 threshold upon selling their residences, while 10% might exceed the $500,000 cap. This marks a notable increase from just 1.3% in 2003 and 3% in 2019, as reported by CoreLogic.

If Flemming and Currie retain their home until death, their children would benefit from a stepped-up tax basis. This allows the adult children to inherit the property without incurring capital gains taxes on the appreciation that occurred during their parents’ ownership. Federal estate taxes would only apply if their combined assets exceed $28 million—well above their home’s value.

This tax structure is leading many older homeowners to cling to their properties for life, which complicates the housing market for younger families seeking larger homes. The so-called “lock-in effect” discourages empty nesters from moving into more suitable accommodations, contributing to a stagnation in the market. Jim Parrott, a fellow at the Urban Institute and former housing policy advisor in the Obama administration, noted that this phenomenon results in a “gumming up of the market.”

In 2022, real-estate firm Redfin reported that empty-nest boomers owned double the number of larger homes compared to millennials with children. This disparity creates a mismatch between current living situations and future needs, adversely affecting the housing market in high-demand areas. Parrott remarked, “The knock-on effects for what’s a completely reasonable decision for empty nesters is utterly unreasonable in its macro impact on the housing market.”

Discussions surrounding potential reforms to the capital gains tax are gaining traction in Washington. Former President Donald Trump suggested eliminating the tax entirely, while Rep. Jimmy Panetta, a California Democrat, has proposed legislation to increase the exclusion to $500,000 for individuals and $1 million for joint filers, along with indexing it to inflation.

Critics argue that offering tax relief could disproportionately benefit wealthier individuals, raising concerns about the potential regressiveness of such measures. Parrott has suggested a more targeted reform to assist older homeowners, proposing to double the exemption and index it to inflation for those aged 65 and above or who have owned their homes for at least a decade.

Nonetheless, some tax policy experts caution against additional breaks for affluent Americans. Daniel Hemel, a tax law professor at New York University, expressed skepticism about the effectiveness of reform in alleviating housing affordability issues. “From a national debt perspective, this seems like the worst possible time to deliver a big capital gains tax cut,” he stated.

For those like 74-year-old retiree Patrick G. from Colorado, the possibility of renting out their homes has emerged as an alternative. Following the death of his wife in 2023, he is considering renting his four-bedroom property to allow his children to inherit it with the stepped-up basis. “If it becomes inevitable that the home in Colorado is no longer feasible, then I would probably turn it over to a property manager,” he said.

Similarly, Collin Goodall, an artist from New Jersey, is contemplating whether to sell his longtime home valued at approximately $1.2 million more than his purchase price. “I would not like to make a decision about downsizing, driven by, am I going to save a bunch in taxes,” he remarked.

While reforming the capital gains tax might not be a comprehensive solution to the housing crisis, it represents a piece of a more complex puzzle. Parrott acknowledged that addressing the housing supply shortage requires a diverse array of strategies to tackle various challenges.