Urgent Tax Shift: Boomers Hold Homes, Impacting Housing Market

UPDATE: A growing trend among older homeowners is emerging as baby boomers choose to hold onto their homes rather than sell, significantly impacting the housing market. With escalating home values and a looming capital gains tax, many are opting to keep their properties for their children to inherit tax-free.

According to the National Association of Realtors, about 34% of U.S. homeowners may exceed the $250,000 capital gains threshold for single filers if they sell, with 10% potentially surpassing the $500,000 cap for married couples. This trend is rising sharply; just 3% of sellers were affected in 2019, a stark increase from 1.3% in 2003.

Retiree Duane Flemming, 81, and his wife Chris Currie have been in their four-bedroom home in California for over 41 years. They want to downsize but are deterred by a potential $30,000 to $60,000 capital gains tax on their $800,000 home appreciation. “We don’t need it, and we would love to be able to get rid of it in an easy fashion,” Flemming stated.

The capital gains tax, established in 1997, imposes a tax rate as high as 20% on profits exceeding the thresholds. If adjusted for inflation, the threshold for individual home sellers would be nearly $496,000 in current dollars, highlighting a significant gap in policy.

Holding onto homes allows heirs to benefit from a stepped-up tax basis, meaning they would only pay taxes on appreciation after inheritance. This policy is encouraging older homeowners to stay put, contributing to a “lock-in effect” that is clogging the housing market. As Jim Parrott from the Urban Institute noted, this situation creates a “giant mismatch” between the homes older adults occupy and the needs of younger families.

Despite bipartisan discussions in Washington about reforming the capital gains tax, no concrete changes have been established. Rep. Jimmy Panetta has proposed legislation to double the exclusion amount and index it to inflation for older homeowners, but experts warn that such reforms may not significantly ease housing affordability issues.

Additionally, some retirees are considering renting their homes to avoid capital gains taxes. Patrick G., a 74-year-old retiree from Colorado, is contemplating renting out his property after losing his wife. He stated, “I would probably turn it over to a property manager and let it become either an income stream or an appreciating asset for my kids.”

As this trend continues, the implications for the housing market are profound. The increasing number of empty-nester boomers holding onto larger homes is exacerbating housing shortages for younger buyers, particularly in high-demand areas.

For now, the situation remains critical, with potential legislative changes on the horizon but no immediate relief for homeowners looking to downsize. The lock-in effect continues to shape the market dynamics, leaving many to ponder their next move as they navigate the complex landscape of housing and taxes.

Stay tuned for further updates on this developing story.