A “Simple Fix” for Primary Residence Sales Could Help Housing Woes
“Due to the significant tax bills they would face, far fewer older homeowners are selling their residences to downsize or move to retirement facilities, increasing demand and prices and leaving fewer homes available for younger home buyers to purchase,” said Kenny Parcell, 2023 President, National Association of REALTORS® (NAR). Prohibitive tax bills on large capital gains on primary residence sales are impacting the residential market, contributing to issues of housing affordability, inventory available to the market, and a homeowner’s ability to downsize.
Increasing the capital gains exclusion amount on the sale of primary residences is "something that could bring immediate supply to the market,’ said Lawrence Yun, chief economist at NAR.
The Section 121 Primary Residence Exclusion, sometimes called the Home-Sellers’ Exemption, is part of the Internal Revenue Code that allows a homeowner to exclude gain on the sale of a primary residence. When selling a primary residence, married couples filing jointly can exclude up to $500,000 and single filing taxpayers can exclude up to $250,000 of gain from their taxable income on the appreciation of their home at sale.
Proponents are calling for an increase in the value of the exclusion for taxpayers.
The current value of the Section 121 Exclusion was set in 1997 and not indexed for inflation ($100 dollars in 1997 dollars is worth $192 in 2023). Legislators, the National Association of REALTORS®, the California Association of REALTORS®, and others have all advocated for change.
U.S Representatives Mike Kelly (R-PA-16) and Rep. Jimmy Panetta (D-CA-19) have reintroduced bipartisan legislation, the More Homes on the Market Act, in Congress that would increase the exclusion to $500,000 for single filing taxpayers and $1 million for married couples filing jointly.
California homeowners, as do those in many high-priced housing markets, feel an outsized impact, facing some of the highest housing costs in the nation. Housing purchased for $60,000 in the 1980s could fetch more than a million dollars today. Many homeowners on the East Coast face similar circumstances.
Primary residences are often a property owners’ largest investment. Many homeowners have held their primary residence for decades and face a significant amount in capital gains tax as the value of their home has increased many times over. The tax bill can be a large obstacle for many of these property owners. “I’ve come across way too many people in the 19th Congressional District who want to sell their homes but can’t afford to due to the financial hit they’ll incur [from capital gains taxes]. That leads to fewer homes on the real estate market, housing shortages and housing affordability issues throughout my district,” said Rep. Panetta. “Such a simple fix would allow homeowners to downsize sell their homes and keep their nest-egg intact… and better ensures that more families have access to owning a home.”
Section 121 addresses gain on primary residences where Section 1031 cannot, as like-kind exchange treatment applies only to the portion of property used for investment.
As a tax policy, the Section 121 Exclusion creates inventory in the residential housing market and allows long-time homeowners to protect their nest-egg. Sellers are more likely to sell knowing they can afford their tax bill, so are more likely to let go of property that no longer suits their needs. The More Homes on the Market Act is an effort to address housing affordability issues, incentivize more homeowners to sell their houses, and increase the market supply. An increase in the exclusion amount of Section 121 is an important tax tool and would encourage a healthier residential real estate market.