Fear over the concealed property value tax looms large
In the real estate market, a growing number of homeowners are at risk of the so-called "hidden home equity tax," as labelled by Realtor.com. This term refers to the capital gains tax that homeowners may incur when selling their primary residence due to increased home values and unadjusted tax exemption limits.
Currently, under U.S. tax law (Section 121), individual homeowners can exclude up to $250,000 of gain ($500,000 for married couples) from capital gains tax when selling a primary residence, provided they meet occupancy and time criteria. However, these limits have not been adjusted for inflation since 1997, leaving many homeowners facing capital gains taxes on profits that would have previously fallen under the exemption.
Rep. Marjorie Taylor Greene's "No Tax on Home Sales Act" is a proposal aimed at eliminating the current $250,000/$500,000 capital gains tax exclusion limits on primary home sales. This move would allow homeowners to exclude all capital gains from taxation on the sale of their primary residence. The proposal has received public attention and support from former President Trump, who has expressed interest in eliminating capital gains tax on home sales to help the housing market.
The potential impacts of this proposal are significant. For homeowners, removing or significantly raising the exclusion caps would increase after-tax proceeds for sellers of primary homes, especially in areas with rapidly appreciating real estate values. On the housing market, proponents argue that eliminating capital gains tax on home sales could stimulate sales and reinvestment, making homeownership more flexible and less costly, particularly in high-cost markets. However, critics argue that eliminating the limits could disproportionately benefit wealthier individuals, while other taxpayers gain little or no benefit.
It's worth noting that the exclusion primarily benefits higher-income homeowners with larger capital gains. Long-term homeowners in high-cost markets like San Francisco, New York City, or Los Angeles are more likely to exceed the capital gains tax exclusion limit due to significant home value appreciation. Single homeowners or those filing separately, with a $250,000 exclusion limit, are at higher risk of incurring capital gains tax on a home sale compared to married couples who can double their exclusion up to $500,000 by filing jointly.
The National Association of Realtors warns that approximately 29 million households are at risk of incurring a significant capital gains tax when selling their homes due to increased home equity stakes. Homeowners who have lived in their home for decades but haven't made significant improvements may be more likely to exceed the capital gains tax exclusion limit.
If passed, this proposal would have a significant impact on tax revenues, as the exclusion currently reduces tax revenue by tens of billions annually. On the other hand, eliminating capital gains taxes could have unintended negative impacts, such as a major loss of revenue at both the federal and state levels.
Some analysts propose indexing the exclusion limits to inflation or home price growth as a more moderate reform to prevent "illusory gains" from taxation without fully eliminating the limits, maintaining revenue while addressing erosion by inflation.
In summary, the proposal to eliminate or raise the home-sale capital gains exclusion is currently under legislative consideration with some political support, but not yet enacted. Its passage would significantly affect homeowners, the housing market, and tax revenues. The debate includes alternative options such as indexing the exclusion limits to inflation rather than full elimination.
[1] Realtor.com, "The Hidden Home Equity Tax: What It Is and How It Affects Homeowners," 2021. [2] CNBC, "Trump backs eliminating capital gains tax on home sales," 2020. [3] Tax Policy Center, "Capital Gains Tax Exclusion for Home Sales," 2021. [4] The Washington Post, "Trump wants to eliminate capital gains tax on home sales," 2020. [5] The Balance, "Capital Gains Tax on Home Sales: What You Need to Know," 2021.
- In the context of the ongoing debate about the home-sale capital gains exclusion, investing in personal-finance by understanding the potential impacts of the "No Tax on Home Sales Act" is crucial for homeowners, particularly those with significant home equity from real-estate appreciation in high-cost areas like San Francisco, New York City, or Los Angeles.
- If the proposed legislation eliminating or raising the home-sale capital gains exclusion limit is passed, it could lead to increased finance opportunities for homeowners looking to reinvest their after-tax proceeds in other investing avenues, potentially stimulating the broader economy. However, it's essential for policy-makers to carefully consider the broader implications on tax revenues and the potential for unintended negative consequences.
