That example is helpful because I was only considering older people downsizing. It would still be nice to find some data but I’m coming up dry. Probably because I’m not quite sure what to search for.
It’s kind of hard to find data on what people don’t do. I wonder if there is data on house size versus age. (Of the resident, not the house.) If people over 60, say, have higher average house sizes than people 30 - 50 (prime child raising years) that would show a problem.
I just thought of another problem. I wonder if people worry that we’re in a bubble. If my house price goes down $300 - $400 K I wouldn’t give a crap, but if someone buys at the top it could be a real problem.
Nope, and while that could be seen as unfair in a “the house always wins” way, it also pretty clearly opens the door to shenanigans. Real estate has a problem with valuation chicanery as it is.
I’m in agreement with BobLibDem. If you make a profit of $500,000 on your house sale, that’s a handsome-enough gain that you should pay taxes on it.
I didn’t realize you could no longer avoid the tax by buying a comparable home within a year. That’s huge. That means anyone who lives in an area where housing costs have gone through the roof is trapped. They can’t afford to move because they’d lose a big chunk of the value of their home and they’d have to find something significantly cheaper to move into, unless they have mountains of cash lying around.
I think it was eighteen months but I am another one who was surprised by this.
That’s nice. Then I am going to stay here alone in my three bedroom house for another two or three decades because I can’t risk losing a chunk of my savings like that if I live too long. Obviously this would be different if it was a rental property or second home aside from the primary residence.
Is there any info on how much of a change this would actually make? Probably not, since this is some random dead-end bill, but it would be nice to know some actual estimates of the hit to revenue and effect on the housing market.
It’s an excellent question but I don’t know if it’s even possible. How would they know about people who are likely to stay put if this passes?
I’ll throw in a data point. I was on the board of an organization that developed affordable housing for seniors for six years (2013-2019) in a town with relatively high home prices (median home price over $1M even then). Most of these homes were built in the 1950s/60s and originally sold for under $100k and were under $300k even in 1995.
A log of our effort was in getting elderly folks out of single family homes with 1+ acre lots into a safer and more manageable situation in a condo, apartment or assisted living.
In probably 100+ conversations with folks sitting on $700k-$1M in capital gains, the issue of capital gains tax came up exactly zero times. A person selling a house they bought for $200k in 1985 that is now worth $1M is facing a tax bill of ~$50k.
It might be different for people for people with $2M in capital gains, but that’s a vanishingly small number of people. They may have a disproportionately loud voice, but we are talking about <1% of homeowners, I’m sure.
In fairness, I am being kind of a dick here. I have no intention of moving because I love my house and I have no compelling reason to leave. I’ll just refinance if I need the equity in the future which isn’t that likely. There are definitely a lot of retired old folks on the margins though.
The real thing to keep remembering is that most of the gain is illusory. Its simply inflation over 20-30 years.
You’re paying CG taxes mostly on false gains not real gains.
The same is true of CG taxes on other purchases/ investments.
To the degree the gain is real, paying tax is reasonable. To the degree it’s not it’s simply a tax on asset owning.
That’s a wealth tax. Which is worthy of a debate on its own merits.
But what we really have here is a wealth tax on the live-in-one-town-for-30-years middle class. The folks who contributed for so many years to the idea of community stability. While the real fat cats skate.
That made me thing of something:
Case 1:
Buy AAPL stock at 100, sell at 200, you have to pay CG.
Buy it again at 200, sell it at 400, you have to pay CG.
Case 2:
Buy AAPL at 100, sell at 400, you have to pay CG.
Case 3:
Buy a house at $200K, sell it a few years later at $400k, you pay no CG.
Turn around and buy another house at 400K (you got to live somewhere), sell it a few years later at 600K, you pay no CG.
Turn around and buy another house at 600K (you still got to live somewhere), sell it a few years later at 800K, you pay no CG.
Total CG paid: $0
Case 4:
Buy a house at $200K, live in it for a long time, sell it for $800K, NOW you’re paying CG on $600K.
For Case 1 & 2, the amount you pay in CG should be similar.
But for Case 4 compared to Case 3, you have to pay a chunk of your gain just because you held it for a long time.
So it seems you either need to do away with exclusion, or raise it so that it doesn’t distort behavior.
W/ $500k exclusion, wouldn’t you be paying CG on $100k?
So I can be clear, LSL, are you opposing all CG taxes, whether on a home, stock, or any other investment/purchase that increases in value?
What would you consider to be a “real” CG?
I bought my home 5 years ago and it’s doubled in value. If I sold it now I’d get $800k over what I paid for it. That’s not inflation, that is a straight-up windfall. I’d never ever expect that my state or the country owes me a tax break for basically winning the lottery. You can’t characterize every RE gain as inflationary, many are not at all like that.
To answer both @Dinsdale and @squeegee just above.
The difference in price between any asset that’s increased over time is a mixture of real and nominal change. Squeegee’s windfall is mostly real, with just a smidgen of short-term nominal inflation. For many people living in boring houses in boring places over decades, their real “appreciation” may be negative and the change is 110% nominal.
My belief is that all CG taxes on all assets should be indexed to the CPI. All CG should be taxed, but only on the real portion, not the nominal portion. e.g.
Assume you bought [whatever] when bread was $1 a loaf and bread’s now $10 a loaf. Well if you paid $10K for your [whatever], that’s equivalent to $100K now.
So if you sell the [whatever] now for $110K, that’s $10K of current-dollar real gain that you should pay current-dollar CG taxes on. The rest is just inflation that should not be taxed.
Likewise if you sell your [whatever] for $90K. That’s equivalent to a $10K current dollar real loss. So to the degree the [whatever] is eligible for capital loss treatment (currently stocks yes, houses no) you have $10K taxable loss.
The above would apply to real estate, residences, stocks, bonds, artwork, collectibles, etc.
Whether any portion of a residence’s appreciation should be exempt from taxation as a gift to homeowners from taxpayers to encourage home ownership and home-selling is a completely separate matter. Likewise whether capital losses on a residence sale should be tax-deductible.
But IMO a LOT of the motivation for the current exclusion on primary residence sales is a simply a way to backdoor a very, very crude version of inflation indexing onto many, but by no means all, residence sales. That e.g. @squeegee gets the big break on a very short term gain is a glaring example of how a policy decided on faulty accounting grounds amounts to ideological random gunfire into the financial crowd.
Truthfully, a lot of the lower marginal tax rates on CG in the first place are also sops to inflation. They’re in effect saying “Yes, we acknowledge that your numerical gains are falsely boosted by inflation. So pay a lower rate in exchange.”
That is dumb. Taxation ideally should be transparent, logical, efficient, and ungamable. Anyone who ever studied tax law knows that. And they know we’re well away from that ideal and often heading in the wrong direction.
Do you know if they were aware of it, and didn’t care, or hadn’t thought about it. After I retired we thought about moving back to the town we lived in in NJ before moving to California. We chose not to for other reasons, but taxes played no part in our decision. I think most people my age and above (and it sounds like these people are older than me) have never even thought of the possibility of taxes, the cutoff being so absurdly high that it only applied to rich people. Also, our house purchases were bigger, more expensive, houses, where it wouldn’t be an issue.
I think they might be shocked when the tax bill hits. I’m all for the goal of that organization, but I hope they make the downside clear.
The organization is part of the town. We are primarily concerned with the safety of the residents. We don’t get into financial advice. But we get a LOT of complaints about property taxes “driving us out our homes” and demands that the town give seniors a bigger break on property taxes than they currently get.
But we were primarily concerned with octogenarians climbing ladders (never mind stairs), trying to shovel snow and pulling generators out of the shed in a blizzard when the power goes out.
I don’t think their kids were thinking, if Mom dies still in the house, we’ll get the house at stepped up basis tax free!
It sounded like you were dealing with considerably older people than I was referring to. Like I said, I’m all for this, but it would seem to be nice to provide all the information, without giving advice.
I know a bunch of people who are retired and who can’t find affordable housing, so not all of us are sitting pretty. There are programs, of course, but they all have long waiting lists.
I don’t think you understand how any of this works. We are not going to try to walk the line between “provide all the information” and “giving advice”. It’s a government body, there are very strict rules. We tell them about the affordable units we are developing and talk about safety and convenience. We listen to them complain and give us reasons why they feel they don’t need to, or can’t move. We don’t respond to any complaints that are financial in nature. Most of us are volunteers who work for banks, developers or municipal finance agencies in our day jobs. We’d be crazy to get into financial discussions with people in our volunteer roles. Nor are the full time municipal employees of the Fire/EMS Department and the Council on Aging. The lawyers would be on us like flies on shit.
Any time they bring up their financial situation we refer them to their “CPA, Financial Advisor or trusted family members”. Whatever they bring up about taxes or investments, we listen and then change the topic back to safety and services that are available in the senior housing condos/apartments.
BTW, at least half these folks have their houses in some kind of trust or llc for one reason or another. “All the information” would be dropping the entire Internal Revenue Code and Massachusetts General Laws on them.
But that assumes they know there is going to be tax implications. Would it be violating any rules telling them that their might be, and that they should talk to their CPA? I understands this goes against the goal of getting them to a better place, but do you really want them and/or their kids coming back to the agency complaining about full disclosure?
Let’s be on the side of the angels 100%