“Boomers selling their homes for $2 million after buying them in 1969 for 7 raspberries.”
The internet meme has touched Millennial nerves across the country for some time, but it’s got real economic consequences. New federal legislation could pull more of those homes off of the sidelines and into the churn of American housing stock.
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These home sellers are facing a problem: the market value of their homes has increased drastically over the years since they paid the three-raspberry down payment for them. While many would benefit from downsizing into a much more manageable home, doing so subjects them to a capital gains tax that could be sizable.
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Current American property owners have an estimated $55 trillion in unrealized taxable profits due to the rising value of their homes and other properties.
New federal legislation would exempt many of those homes from the capital gains tax under certain preconditions. The seller must be over 65, selling a home for less than $500,000, and it must be sold to a first-time home buyer.
“The American Dream has always been to own a home; however, that dream has been slipping away,” Rep. John McGuire, R-Va, said. “Today’s housing market makes it increasingly difficult for first-time buyers to find an affordable home, leaving many with little choice but to become a life-long renter.”
The legislation would apply to second homes and vacation rentals that the senior citizens have bought over the years. It’s also temporary. The bill, if enacted as is, would sunset in five years.
The aim of the bill is to unclog a portion of the American home inventory’s plumbing. For the first time, the average age of a home buyer has surpassed 40 years old.
The issue is made worse by investors paying up to 35% above market price in some states. The lack of homes ultimately leaves more first-time buyers on the sidelines, doomed to rent instead of start building equity.
Brass tax
Current federal tax law shields homeowners from paying capital gains taxes when you sell your home. A single taxpayer can exclude $250,000. That doubles for married folks.
If your parents bought their home when Sonny and Cher’s “I Got You Babe” was in the Billboard Top 40, that half-million isn’t going to make a dent. If they picked a decent location, the home is worth millions today. Even homes built and bought in the 1980s for a couple hundred thousand dollars are listed for a couple million dollars on Zillow right now.
Tax law subtracts what the Boomers paid for them and considers the rest a capital gain, subject to tax rates up to 20%. There’s ways to get around the tax, such as pouring that money into another home in the same tax year.
