Riding the Capital Gains Wave

Rosemarie Tucker July 3, 2023

According to MarketWatch, many homeowners, taking advantage of record-low mortgage rates, are hesitant to venture into a market characterized by rising costs and a limited number of listings. A prominent legislator believes the key to unlocking this stalemate is a careful recalibration of governmental policies.

The narrative unfolds against the backdrop of a coastal California district, represented by the diligent Democrat, Jimmy Panetta. This district, renowned for its high-value housing markets, showcases the challenges at hand. In a demonstration of bipartisan collaboration, Panetta partnered with Pennsylvania's Republican Mike Kelly in March to propose a new piece of legislation. The goal is to raise the amount of profit homeowners can shield from taxes when they sell their primary residences.

Their proposed "Expand Housing Opportunities Act" seeks to enable single homeowners to exclude up to $500,000 from taxation, while joint-filing couples could exclude up to $1 million. An added feature of this proposal is that these amounts would be adjusted according to inflation in the years to come.

Presently, single taxpayers can exclude $250,000 from taxation, a number which doubles to $500,000 for joint filers. These values, set in 1997, have remained unchanged for over a quarter of a century.

In a sober conversation with MarketWatch, Panetta described the proposal as "a straightforward and practical solution."

"Do I sell my property, now significantly appreciated, and face a potentially high tax bill? Or do I continue to hold onto it, perhaps passing it on as an inheritance?" — Jimmy Panetta, California's Democratic Representative

Panetta's constituency stretches from South San Jose to Santa Cruz, along the Monterey County coastline, up to the northern San Luis Obispo County area. In these high-cost regions, average property prices frequently exceed $1 million, according to the California Association of Realtors.

As Panetta articulates it, numerous long-term homeowners grapple with a dilemma: "Should I sell my property, now considerably valuable, and deal with the consequent taxation? Or should I maintain ownership, potentially to pass it on in the future?"

He shared anecdotes of constituents who purchased homes in the 70s and 80s, whose properties have since seen their values skyrocket. For instance, a Santa Clara homeowner who bought a house in 1997 for $300,000 has witnessed its value soar to $1.8 million.

Similar increases in property values have been reported in other areas. "These homeowners remain in houses they no longer need, thus keeping these properties off the market," he said.

According to Panetta and Kelly, increasing the tax-free profit homeowners can earn from selling their homes would incentivize more people to sell.

An upcoming study from the National Association of Realtors (NAR) projects that by adjusting the capital-gains exclusion for inflation from 1997 and increasing the exclusion to $450,000 for single filers and $900,000 for joint filers, the single-family housing market would see an increase in supply of between 159,000 and 344,000 homes nationwide. That's a significant 39% to 85% increase on the average number of new monthly listings in 2022.

The shortage of inventory is a substantial challenge to the housing market. "Home builders can add more supply, but that process takes time, possibly years," Lawrence Yun, NAR's chief economist, stated during a recent briefing on home sales data.

Increasing the capital-gains-tax exclusion is "an initiative that could promptly increase market supply," Yun suggested.

The existing capital-gains exclusions were set in 1997 and do not consider inflation.

Jeff Tucker, Senior Economist at Zillow, noted that the proposed legislation would have a more pronounced effect in real estate markets like the San Francisco Bay Area, as well as in coastal areas like New York City and Seattle, where homes often sell for over a million dollars. However, its impact might be less substantial in lower-cost housing markets."

To wrap up, navigating tax laws, especially when it involves potentially significant capital gains from real estate transactions, can be complex. The proposed legislation mentioned here could bring considerable change to homeowners planning to sell. As such, it's crucial to understand fully how these changes could impact your specific situation. Therefore, reaching out to a professional accountant for advice tailored to your circumstances is strongly recommended. Keep an eye on the progress of the legislation, and remember, informed decisions are the best decisions.


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