Economists: Capital Gains Tax Is Keeping Boomers Behind – The Mortgage Note

The federal capital gains exclusion – capped at $250,000 for single filers and $500,000 for married couples – has never been adjusted for inflation. This is hurting Baby Boomers who want to sell their homes.

That’s according to Lawrence Yun, chief economist at the National Association of Realtors, and Selma Hepp, chief economist at Cotality.

Yun and Hepp were presenting at the National Association of Real Estate Editors conference in Miami on June 3 when the topic came up at the annual Economic Forum.

Yun started by saying that the U.S. job market is at a record high, which should correlate with high home sales, but that isn’t the case due to unfavorable conditions. A lack of inventory, particularly in the Northeast, and high mortgage rates have kept homebuyers sidelined.

One of the reasons for the lack of inventory is the fact that Baby Boomers who may want to sell their homes feel stuck in place.

“Strong price increases have led to the condition where more American homeowners are getting ensnared in capital gains tax,” Yun said. “Elderly widows whose lives may improve from (moving) to a smaller size, they’re not selling because they don’t want to be hit with the capital gains tax.”

Yun said this is a top advocacy issue for the National Association of Realtors, which will be hosting a legislative meeting in Washington, DC, from June 13 to June 18. He said leaders at NAR would like to see a doubling of the exclusion.

Hepp, who presented after Yun during the forum, said analysts can see that there is an increase in sales where the capital gains threshold is reached.

“Lawrence just talked about where currently that threshold should be if we are adjusting for inflation, and a $500,000 threshold would actually be $1 million today if it’s adjusted for inflation. We are looking at 1997 dollar amounts when this was put in place,” Hepp said.

The Mortgage Note reached out to the Cotality team for more details on Hepp’s thoughts, and they responded with the following quote:

“Current capital gains taxes are still based on the $500,000 threshold set in 1997, which has not been adjusted for inflation. So, as we see a surge in home prices, potential sellers aren’t listing their homes because they don’t want to be impacted by these taxes. Ideally, the tax threshold would be adjusted for inflation to at least $1 million, so fewer households would be subjected to the tax and be willing to sell their homes.”

The Mortgage Note also reached out to the team at the National Association of Realtors. They provided a fact sheet that said the outdated thresholds for capital gains taxes are distorting the housing market and locking up inventory.

According to leaders at the National Association of Realtors, people in every demographic are paying the price for the outdated thresholds. That includes young buyers, growing families, and empty nesters.

Local economies also suffer. Home sales generate jobs, tax revenue, and economic activity. Real estate is approximately 18% of the U.S. economy, leaders at the National Association of Realtors say.

A map included in this Realtor.com article shows how capital gains exposure varies significantly across states. Hawaii, California, New York, Florida, and Texas have the highest exposure.

The National Association of Real Estate Editors conference in Miami ended on June 4. Next year’s annual event will be held in Austin, Texas.