Or rather, if you can structure the transaction as a 1031 exchange and report it accordingly you can avoid the tax.
For folks who don’t know what 1031 exchanges are, or for transactions for which 1031 is inapplicable, the tax is owed on any gain above the exclusion amount.
1031 is a great trick for real estate investors to defer taxes on accumulating gains as they buy & sell properties. It’s really a separate parallel taxation to the “straight gain on your primary residence” that the OP was starting from.
Nope, you’re correct, I was having a brain fart and forgot that while it’s possible to do the 1031 thing for your primary residence you have to jump through a bunch of hoops and you’re probably not doing that unless you manage properties anyways.
The stated purpose of this bill is to encourage turnover of housing. If older folks are staying in their too-big residence that they’ve owned for decades rather than move, then there’s a lot less housing on the market. It’s particularly bad in California.
We’re retired and want to downsize and move to a less expensive state. We can pay cash in the new state, but really need any leftover money after the new purchase to add to our portfolio to supplement our social security. If this bill doesn’t pass, that’s a fat chunk of tax money we must pay out and that won’t be helping to support us. So we’re dithering on whether we should just stay put. And that’s what’s contributing to the short supply of housing in this state - us oldsters staying put.
Worst case scenario – say you can net $999,999 by selling your home. Under the current law, you get $500,000 tax free, and pay capital gains tax (say 15%) on the other $499,999, or $75,000. Sure, $75,000 is a big chunk, but you’re still $924,999 in the clear. You’d really rather stay put than have $925K in the bank?
Also … if the law passes and you get to keep that $75K, a lot of less wealthy Americans are subsidizing that bonus for you. Sure, someone (who can afford a million-dollar-plus house) gets to buy your old home, but is that worth it to the rest of us?
Agree with this, sorry Teela. I’m sitting on a property that I bought 5 years ago. If I sold it, I’d pocket a $800,000 gain. With $250k excluded (I’m single) and 20% capital gains, I’d pay $110k on that gain, or 13.8% tax on the total – exceedingly cheap – and walk away with $690,000 dollars just for paying my mortgage for 5 years. In other words, I was paid (handsomely!) to live in my house all those years.
I mean, I’d rather pay zero, but I’m hardly crying.
That’s interesting. As a Canadian I did not know Americans had to pay capital gains tax on their principal residence under any circumstances when it sells.
It is not uncommon for people to “flip” houses for profit. Buy cheap, fix up while living there, then sell at a profit. I see no reason why this would not be taxed.
Wow - ignorance fought, here! When did that change?
(Of course, I’ve never owned a home that would be anywhere NEAR the $500k capital gains…)
Sorry to jump on the bandwagon, teela. While I sympathize with folk who are disadvantaged by the housing shortage, I’m not sure a favor a solution which gives even more benefit to folk who are already well off. Be careful to whom you try to suggest your current situation reflects your philanthropic and self-sacrificing nature.
The fact is, the tax rolls are not getting that money, since people in that situation (like me) aren’t going to sell when the effective price they can get for their house is reduced by the tax.
My wife and I are sitting in a five bedroom house. If I could sell it without such a hit some people with a new family could move in, and we could get a condo. We’re not alone in this, lots of our friends are in similar situations.
And when one of us dies the house value resets and the money is lost anyhow.
Really expensive housing markets are expensive in no small part due to lack of inventory. Putting more inventory on the market helps everyone. Sure it would reduce my house’s price, but not by nearly as much as the tax bill.
So if an American buys a house in 1983 for $150,000 then lives in it for 40 years, sells it for $1,000,000 in 2023, he has to pay a capital gains tax? (Curious because under Canadian tax law you would not with those facts)
So you’d rather stay in a house that’s too big for you, someplace you no longer want to live, and not have access to the profit your property has earned, because you’ll have to pay the government a relatively tiny fraction of that profit? You’d literally rather die without ever seeing any of that money than pay taxes on it?
Okay. That’s your right.
But I fail to see where other taxpayers should subsidize making that decision easier for you by making your tax burden even less.
If we’re talking about $75,000 that can either go to the government or stay (unrealized) with you, I’d rather the government pay $75,000 to build lower-income housing than give it to you in a roundabout way to increase the supply of higher-income housing.
So I don’t agree that the exclusion should be raised because housing prices have gone up. But I do agree that the exclusion should be raised because $500,000 in 1997 dollars is $940,000 in 2023 dollars. It seems fair that this should be inflation indexed.
Put that way, yeah, it does seem fair. But rather than admit my arguments to this point have been wrong , I’ll counter that just because the limit was set ridiculously high in 1997 doesn’t mean we should maintain it at that level.
Don’t think teela’s alone in this. We’re talking about a tax check bigger than most people’s annual income. It’s also possible to get access to your home’s equity without paying capital gains taxes.
It’s a big chunk of money from people who are “house rich” without necessarily being “rich rich”. My home’s value has increased significantly, if I needed to sell, I’d make a lot of profit that I’d have to spend immediately on a new place to live. I’m sure the $500k waiver would cover me, but the concept that homeowners should pay taxes on the profits they make when selling their residence is fundamentally flawed.
There is plenty of actual free flowing income that can be taxed rather than monies that often have to go right back out again because people aren’t walking away from the concept of owning a home.
As the OP states, they’d have to pay a flat 15% tax on $350,000 - the gains would be $850,000 and there is (currently) a $500,000 exemption for couples. So overall, the taxes would be ~5% ($52,500) of the sale price.
On the margins, there are surely people who are dissuaded from selling by the tax. Like, if you forget the taxes altogether, there are presumably houses out there where the owner would sell for $950,000 but not $900,000; that’s how prices are supposed to work, at least. That some of that difference is a tax instead of a lower price shouldn’t change much.
IMO a large part of the housing shortage in various places is that homeowners had undue influence over the supply of new homes, so I would be very reluctant to try to solve the problem by giving them a tax break on the windfall that resulted from the shortage.
Most of the cosponsors of this bill are from California, where you essentially don’t pay higher property taxes when your house increases in value. Downsizing could quite possibly result in paying much higher property taxes there. I’m not very sympathetic, but I can see why people would be annoyed at paying a capital gains tax to unlock a higher property tax.
Having the extra money in our account would make absolutely no difference in our lives. Moving would be a pain, but endurable perhaps, but I’m not about to pay a couple of hundred thousand bucks for the privilege.
But you didn’t address my point about how the tax system incentivizing people to stay in houses that are too big for them is hurting new buyers, and especially in hot markets where there is a housing shortage.There is a good bit of new construction near more, mostly condos since there isn’t a lot of empty space for houses, but it hasn’t increased the supply nearly as much as is needed.
Low income housing is required of new developments, but it is still expensive and not as much as is needed. In any case my tax money would go to Washington, where it is unlikely to come back here to do any good.
Actually not an issue. Propositions allow us to carry our property tax rate with us in most cases. I’m not up on the details not planning to move. Moving to another state would mean a lower house price, and maybe lower taxes, though property taxes in Texas, say, are very high. Not that I’d ever move there.
In hot markets you don’t have to sell for less, unless the realtor has caved in and put an unrealistically high price on the house. Plus, taking a bit less due to the market (which implies you’ll be able to buy your next house for less also) is a lot different psychologically than sending it off to the government and not having that money for your next house.
Plus, you are underestimating the extent of the problem. When my neighbor passed away, his house sold for $1.65 million - 1600 sq ft or so, not a McMansion. I don’t know for sure what he paid on it, but I do know his property taxes and they were a lot lower than mine, so I expect it was something like $100 K. You could see why he and his wife wanted to stay. Real estate agent fees and home improvements don’t make much of a dent in that.
You are right about the NIMBYism around here. At a HOA meeting I went to it was odd to hear people bemoan the fact that we can’t hire enough police because of housing costs and the nerve of the state trying to force towns to allow taller buildings for new condos. But a couple of dozen new apartments isn’t going to fix the problem. We need to do everything possible to increase the stock.
, I’ll counter that just because the limit was set ridiculously high in 1997 doesn’t mean we should maintain it at that level.