Is it? We tax every other kind of long-term capital gain, without exempting the first $500K (or $1 million).
Sorry for quoting you out of order, but this kind of answers my point above. This is what makes home ownership different from other long-term investments, and I do believe there should be exemptions built in for buying (or even renting) another residence. If you make $800K profit on home #1 and buy home #2 for $800K cash, you owe no taxes. If you take out a mortgage on home #2 (or rent it), there should be a formula that determines how much tax (if any) you’d owe.
Maybe the $500K exemption is just a simpler way of accomplishing the same thing. I’m obviously no expert on taxes or real estate.
I’m really not qualified to address it. As I explained, it seems incredible to me that this relatively small amount of tax would deter you and neighbors like you from moving, but if you say it’s true I have to believe you. And if tens of thousands of people are like you, then yes, I can see where that would make the market more challenging for new buyers.
I also understand that it’s no simple matter to just increase the supply of housing by building a bunch of lower-cost homes (and that in parts of California the price of even a “lower-cost” home would blow my mind).
I’m just skeptical that the best way to increase housing supply is to let people keep a million dollars in capital gains tax-free.
I suspect the $500k exclusion was largely intended to lessen the tax liability of persons fortunate enough to have such capital gains, rather than for administrative economy.
A whole lotta people who feel they shouldn’t have to give up any portion of their very substantial profits, whether those gains result from their astute investing or just plain good luck. Never overestimate the greed of the well-to-do.
I’m sure all of these persons who are distressed over the lack of affordable housing would gladly pay the CG tax if they were assured that the taxes would go directly to the construction of new affordable housing!
Not to speak for the posters here who favor the larger exemption, but I imagine they don’t think of the increase in the value of their home as a “profit.”
It’s worth a lot more now than when they bought it, but that value increase is due to inflation, improvements they’ve paid for over the years, and maintenance (another cost) that’s kept the home attractive to potential new buyers. Plus, many will have to immediately invest some or all of that “profit” in a new residence.
That’s why I’m not opposed to some exemption. But at the end of the day, selling something for more than you paid for it is a profit, and should be taxed.
Thanks for the info. Interesting. Under those facts, in Canada, there would be zero such tax owed. So if the circumstances were reversed, and you paid a large amount for your house then years later got a “shit kicking” on the sale, you can declare a capital loss?
I agree. I’m not sure how selling your principal residence at a premium can be a “profit”. If you bought a 1970 Hemi Cuda for $6000 in 1970, drove it minimally for 53 years, then sold it in 2023 for 1.5 million to a collector, is that a “profit”?
It sure looks like profit to me. You earned 11% on that investment. I could see marking it down a bit based on inflation, but this is what profits are. The issue with a principal residence is that you’re almost certainly going to need a new car to replace the one you just sold, and the new car is likely to cost something resembling 1.5 million.
Yep. A lot of myopic greedy folk think any thing they personally benefit from is well earned and ought to be preserved at all costs, while all those OTHER folk ought to support everything society needs.
These same folk often complain about having paid into Social Security, because if only they had been able to keep that money, they would’ve invested it in Apple when it was under $2 a share.
I was thinking, if these folk owned a home that drastically DECREASED in value - maybe due to climate caused erosion, or because a pig farm or expressway was built next door, or just a general decline in the neighborhood - how much you wanna bet they would consider that reduced value a LOSS.
But the profit? No, that’s just what they are entitled to, thank you very much. People are weird.
I’m not talking right or wrong, I’m talking reality. If a six figure tax is relatively small to you, my hats off to your investment prowess. The people in this situation are not rich - many are former teachers, or other such middle class jobs. By good luck and longevity they now have a lot of money in their houses. I don’t know of anyone who thinks this happened because they were smart.
I was at lunch yesterday with my former boss who just renewed his real estate license. I mentioned that we couldn’t sell for the tax hit, and he nodded sagely. It isn’t just me. This is one of the reasons we get bombarded with flyers asking if we want to sell. And it happens in hot markets where the prices are inflated. That’s where more housing stock is more necessary.
I also never said it was the best solution, just one. The state forcing cities to allow taller buildings near transit hubs is a better solution, since that not only increases housing stock but increases us of mass transit and decreases driving. But there is no reason not to do both if you want to increase the amount of housing. Right now the family with 2 kids is stuffed into a small condo or apartment while retired people with no kids are in big houses. It should be the other way around, but around here the system is discouraging that from happening.
You keep missing the point. No one is asking anyone to feel pity for those of us with a lot of home equity. The issue is that those people are not going to make stupid personal financial decisions because they aren’t stupid people. Also they are likely on fixed incomes and will eventually need to tap into that home equity to survive should they live long enough.
They would like to downgrade to a smaller house but they won’t if it will cost them a lot of money. It’s only common sense. We have a problem with housing. This is one of the solutions.
What do you think those people should do under the current law? What would you do?
A six-figure tax as part of a much larger six-figure (or seven-figure) gain. As someone calculated upthread, it would be around 13%.
But I understand that you need somewhere to live, and that whatever you pay in tax is just that much less that you have to spend on your next domicile. I get that it hurts. And I have no doubt that you and the others you describe genuinely feel blocked by the current system.
But … do you understand that earning more than a million dollars on an investment is something most Americans will never come close to experiencing? And how wanting that million dollar gain to be completely untaxed looks to others who pay tax on every dollar their investments earn?
If I could sell my house for a million dollars more than I paid for it, I’d be out of here so fast the screens would rattle. And I’d send Uncle Sam a check for $75K in an envelope sealed with a kiss.
I think that any argument that rests on freeing up inventory needs to be backed by data showing that there is significant inventory that the policy changes will free up. Then weighed against other options for increasing inventory.
If I were wealthy enough to have such a “problem” and if I wanted to live somewhere else/smaller, I would move. I would be grateful for my good fortune, and would not let a relatively minor financial factor interfere with my pursuit of my desires.
I wasn’t talking about what was or was not “allowed” under tax law, but how people would personally consider it.
To clarify where I’m coming from, I’m not overly concerned with the housing “shortage.” Especially WRT people wanting to buy homes over $500k (presumably WELL over $500k if that is the CG). If you can’t afford to live where you want to live, move somewhere that you can. Yeah, I know. "Waah, waah - it’s not that easy… " Sucks to be relatively wealthy and not have unlimited options.
Once again, the home is the majority of their savings. If they live to be over 100, they may run out of funds and they can’t take that risk. It would be reckless to lose that money.
Not true. Each spouse or co-owner has a $250K exemption up to two owners so if Si_Amigo is the sole owner of the house, he does not get the full half-million.
I’d like to see it also. My “data” is purely anecdotal, I’ll admit, but there are a lot of older people living in big houses around here. That is not to say they’d move even if the tax break was given. When you’ve been in the same place 30 years moving is not so simple.
The prefab houses a few blocks over are going for over a million now. Instead of moving, a lot of people are tearing up their houses and modernizing and adding rooms.
Most of the people I’m talking about bought their houses when prices were relatively sane. I bought mine because I needed a place to live - I thought it was absurdly expensive, but still relatively affordable compared to places like Cupertino. As for people moving in, if you work in tech you’re kind of stuck. Austin isn’t that cheap, and it’s in Texas. People do move to outlying areas, which is why there is always a big delay on I80 West in the morning.
May I introduce you to the Endowment Effect. It may be irrational, but people see home values as not fixed, so chopping off $100K off the price to sell it is painful but not that painful. Having the $100K and losing it to taxes is a lot more painful. I’m talking psychology here, not what a rational economic actor would do - not that they exist in real life.
If you are doing fine with savings and social security, having more money in your bank account is not going to affect your quality of life much. If it does, there are alternatives like reverse mortgages. Someone with this “problem” has been in the same place a long time, and is probably no up to the stress of moving and losing their support system, not to mention doctors. On the other hand lots of people talk longingly of downsizing. But its not going to happen if there is a big financial penalty.
I’m personally fine with keeping the $500K limit. It means I don’t even have to consider moving. But it is going to hurt the inventory to some extent. And that’s not because the people in the houses are big meanies who don’t want to sacrifice a lot of money for the good of the market.
I’m probably a pretty good case study. We live in a townhouse in a “red hot” housing market. We bought almost 10 years ago and between the principle we’ve paid, the improvements we’ve invested, and the overall surge in prices, we would likely clear about $650k in cash from the sale of our home. We probably wouldn’t get to $500k in capital gains because of the improvements and the principal equity, but we’re awfully close. We of course also refinanced at a rock bottom rate.
As our family has grown, we desperately want to upgrade from a townhouse to a single-family home in the same neighborhood, but the starting price is $1.5M. I’m not sure how we’ll ever be able to accomplish that without liquidating a big chunk of stock which is essentially our retirement. Between the new interest rates, the huge jump in cost, and the already painful property tax payments, losing any amount of money to taxes will make it nearly impossible to move. We’re effectively trapped. Whatever profit we make on our current home will be wiped out in the purchase of a new inflated home price.
Certainly, to many folks, these sound like champagne problems, but it’s really not. Anyone who lives in a high cost of living area knows that a 6 figure income can still be a paycheck-to-paycheck existence and relocating is not an option if you want to keep working. Having 2 incomes is necessary and you’re not saving much of anything. This is a precarious middle-class existence.
Our townhouse is the classic starter home in our area. Yeah, it’s expensive compared to the 1200 sq ft. ranch in the exurbs my parents bought as a starter when I was a kid, but if you want to live in this area that’s what starter homes look like. I know there are young professionals who are paying $3500+ in monthly rent that would kill to have our place and start a family. If this tax is preventing people who own single family homes from selling, then that’s raising my costs. And if this tax takes money away that I’d need to put down on a new house, then that’s preventing me from selling.
People love some good old fashioned class warfare, but some empathy might be nice. If this bill passes, I’m sure some multi-millionaire will abuse it to line his pockets and add a third vacation home. But thousands more who aren’t out there stomping on the little guys are taking it in the teeth. Think of it like justice reform…better that 100 guilty men go free than one innocent land in prison. Let’s not punish the many because we’re afraid that a minority will take advantage.