Joel and Kathryn Friedman, both 71, are counting the days until they can sell their home and move into a 55-plus community.
The retired empty-nesters have been ready to downsize for years, but are reluctant to sell their five-bedroom, 5,000-square-foot Southern California house [mansion] in large part because of at least $700,000 in capital gains taxes they estimate they’d have to pay.
Since 1997, home sale profits over $500,000 (for married couples) and $250,000 (for single filers) have been subject to a capital gains tax of up to 20%. That threshold hasn’t changed since 1997, meaning that — between inflation and soaring home prices pushing an ever higher number of houses above that limit — many more home sellers have to pay the tax now than when it was first implemented.
The Friedmans are among a growing number of older homeowners discouraged by the tax from selling their valuable properties. Housing economists say that dynamic has exacerbated a shortage of family-sized homes on the market, especially in expensive places like California.
The Friedmans’ house is too big for them, and maintenance costs are only rising, Joel said. “There are a million reasons why we’d like to move, but we’re not because the tax is just burdensome,” he said.
But that could change — there’s bipartisan support in Congress for raising the federal tax threshold to boost home sales in a stagnant market.
Note while the amount is dramatic, the same general principle applies for a widow selling their 500k house that was 100k and being out 80k in taxes and stuck having to get living arrangements for 420k in a market where her house sold for 500k.
Particularly egregious: if a landlord sold the same sort of house they could turn around and buy a different 500k house with zero tax burden. This exemption is not available to private homeowners, only for investment properties you don’t live in. We give a tax break for using houses as purely financial instruments but penalize people actually buying for themselves.
Your widow would only be out 30k, not 80. There’s a deduction for primary home profits.
The 1031 like-kind exchange you’re talking about is only a deferment. It’s more available yes, but if that exchange chain is ever broken all those taxes need to be paid
You are right about 30k instead of 80k, my mistake, but still a fair chunk of change.
The deferment is reasonable, but it’s insane that an investment property can be traded in without taking the tax penalty, but you can’t do that with a residence.