A new Moody’s report finds capital gains taxes keep home owners from selling. Reform could add supply, lower costs, and change the path of the U.S. housing market.
If there’s one thing everyone agrees on, it’s that housing is unaffordable. Case in point: the National Association of Home Builders said in March that 60% of U.S. households can’t afford a $300,000 home at a time when the median price is now well above $400,000. For most families, the math simply doesn’t work.
There are a lot of reasons why. Zoning rules make it hard to build. Lumber and concrete cost more. Builders can’t hire enough workers. Mortgage rates are high, and many existing owners are locked into loans at half today’s going rate. All of this keeps supply low. According to realtor.com, the number of monthly active listings nationwide only climbed back above one million in May. Before the pandemic, that figure hadn’t dipped below that level since at least 2016.
But there’s another piece of the puzzle.
Housing prices have soared since the 1990s, but the tax rules that govern selling a home haven’t changed a bit. The capital gains exclusion for primary residences is still capped at $250,000 for single filers and $500,000 for married couples. For many long-time owners, especially seniors, that means selling triggers a steep tax bill. Downsizing becomes less about preference and more about what they can afford after taxes.
Economists at Moody’s, the credit rating bureau, put numbers on the effect in a report released this month.
The capital gains exclusion was created in 1997. Before that, owners could defer paying tax if they rolled proceeds into a new home of equal or greater value, and those who were over age 55 could also use a one-time $125,000 gains exclusion if they bought a cheaper house. Congress simplified matters by setting a flat $250,000 for single filers, $500,000 for married couples maximum exclusion from capital gains, with no rollover provision. The change reduced paperwork for homeowners (who no longer had to track rolled over gain from house to house to house) and the IRS alike. But lawmakers didn’t index the exclusion cap to overall inflation, let alone to the increase in housing prices. Nearly three decades later, the exclusion is worth far less in real terms. Had it kept up with the increase in house prices, Moody’s calculates the exclusion would now be $885,000 for singles and $1,775,000 for couples.
