Tax Pressure Forces Boomers to Stay Put, Impacting Housing Market

UPDATE: A growing number of older homeowners are choosing to stay in their homes rather than sell, primarily due to the burdensome capital gains tax on home sales. This trend is not just a personal choice; it is reshaping the housing market and making it increasingly difficult for younger buyers to find affordable homes.

Duane Flemming, an 81-year-old retired veterinarian from a suburb 30 miles east of San Francisco, has spent over four decades in his family home. Despite wanting to downsize, he is apprehensive about the potential capital gains tax of between $30,000 and $60,000 on his profits, which he estimates to be around $800,000. “We don’t need it, and we would love to be able to get rid of it in an easy fashion,” he said, highlighting the financial strain of selling.

Since 1997, homeowners have faced a federal capital gains tax of up to 20% on profits exceeding $500,000 for married couples and $250,000 for single filers. The National Association of Realtors reported that approximately 34% of U.S. homeowners could surpass the $250,000 threshold if they sold their homes, a significant increase from just 3% in 2019.

The tax structure encourages older homeowners to hold onto their properties until death, allowing their heirs to inherit homes with a “stepped-up tax basis.” This means that capital gains taxes apply only to appreciation that occurs after inheritance, effectively erasing the burden of taxes on the value accrued during their parents’ ownership.

Experts are warning that this trend is creating a “lock-in effect,” which is gumming up the housing market. Jim Parrott, a fellow at the Urban Institute, stated, “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.” As older homeowners refuse to sell, younger families find it increasingly difficult to secure larger homes.

Legislation aimed at reforming the capital gains tax is gaining traction in Washington. Representative Jimmy Panetta has introduced a bill to double the exclusion limit and adjust it for inflation, but opinions remain divided on its effectiveness. Critics argue that further tax relief for affluent homeowners is not a strategic solution to the housing affordability crisis.

The emotional toll is evident as older homeowners grapple with their choices. Patrick G., a 74-year-old retiree in Colorado, is considering renting out his home after losing his wife. He seeks to preserve the asset for his children while leveraging the tax exemption available for two years after a spouse’s death. “I would probably turn it over to a property manager,” he noted.

Meanwhile, Collin Goodall, an artist from Rumson, New Jersey, faces a similar dilemma with his home valued at over $1.2 million more than his initial purchase price. He expresses frustration at having to make decisions driven by tax implications, saying, “That shouldn’t be what I’m thinking about.”

As these tax policies continue to influence the decisions of older homeowners, the implications for the housing market are profound. The urgent need for comprehensive housing policy reform is clearer than ever, as the current system creates barriers not only for seniors but also for young families striving for their dream homes. The future landscape of real estate hinges on how policymakers address these pressing issues.