The tax that's stopping older homeowners from selling their valuable properties

• An extra tax on home sale profits over $250,000 was designed to target wealthy homeowners.
• But as home values have soared, the tax is impacting middle-income people, too.
• Two older homeowners said they wanted to downsize but had been discouraged by the tax.

Many older homeowners have benefited from soaring home prices in recent years, but as they look to cash in and downsize, some are discouraged by a federal tax that applies to a growing number of home sales.

Since 1997, home sellers have had to pay federal capital-gains taxes on profits above $250,000 for a single person and $500,000 for a couple. The policy was designed to target the most affluent. But because the tax isn't indexed for inflation and home values have climbed so much, it's begun to impact middle-income people too.

Some older Americans who have retired or are near retirement told Business Insider that the tax had deterred them from downsizing and that they feared it would eat into crucial savings. The tax may be discouraging empty nesters from selling their larger homes to growing families, worsening a shortage of starter homes.

The share of home sales subject to the tax has more than doubled in the past few years. In 2023, 8% of US sellers made more than $500,000 in profit on the sale of their homes, the property data firm CoreLogic found. That's up from 1.3% in 2003 and 3% in 2019. If the threshold had been adjusted for inflation, the $250,000 cutoff for individual home sellers in 1997 dollars would be about twice as high — $496,000 — in 2024 dollars.

"What we know, anecdotally, is that people are feeling locked in," Selma Hepp, the chief economist at CoreLogic, told BI. "There are a good share of people for whom this is the only source of wealth savings."

Some retirees are reluctant to sell

David Levin, 71, has lived in Manhattan Beach, California, since 1978. Now retired, Levin and his wife want to sell their four-bedroom house and buy a smaller home in their neighborhood that they can grow old in.

Their housing investments have paid off — the couple paid $632,000 for their home in 1991, and it's now worth an estimated $2.8 million, according to a local real-estate agent Levin consulted. While they've benefited from their soaring home equity, selling at that price or higher would come with an extra-large tax bill.

Levin estimates that he and his wife will have to pay several hundred thousand dollars in capital-gains taxes when they sell their home. Because the couple is relying on cash from their home sale to support them through retirement, Levin doesn't think they can afford to stay in Manhattan Beach — or live anywhere close by.

"If we sell our house, pay the capital gains tax, with what we're left over with we can't find anything to buy that's anywhere as nice as the home we're in," he said.

Levin, who operated retail stores before he retired, and his wife, a homemaker, both volunteer at their local community college, and they live on Levin's Social Security checks and retirement savings. But they're relying on their home equity to help support them as they age. "Our house has been a piggy bank, so the house is what secures our retirement," he said.

Levin was quick to point out that he felt these were "rich people's problems," but they're indicative of how even well-off boomers are struggling to retire comfortably in the communities in which they've built their lives.

"How can you feel sorry for us? I mean, we have so much more than most people have," Levin said. "It's just the circumstances of our lives make us stuck in our home."

Relief may be on the horizon

Some Washington policymakers are taking note of the strain on some of their constituents. Democratic Rep. Jimmy Panetta, whose district includes several pricey coastal California housing markets, has introduced a bill that would double the tax exclusion to $500,000 for individuals and $1 million for joint-filing couples and index it to inflation. The More Homes on the Market Act is designed to incentivize more homeowners to sell and boost the housing inventory.

"I firmly believe that such a simple, straightforward fix would allow homeowners to downsize, sell their homes, and secure their nest-eggs," Panetta said in a statement to BI. "It's also a commonsense way to help expand the housing market, tackle housing affordability issues in our communities, and better ensure that more families have access to owning a home."

Raising the threshold for the capital-gains tax on primary home sales and indexing the tax for inflation would be a boon for buyers and sellers alike, Hepp said.

"It would provide some velocity in the market and maybe release some inventory that's not efficiently utilized, like baby boomers living in a really large home when they would prefer a smaller home," she said. The real-estate company Redfin reported that as of 2022, empty-nest boomers owned twice as many homes with three or more bedrooms as millennials with kids.

Andrea S., a 60-year-old homeowner in the Los Angeles neighborhood of Sherman Oaks, hopes Congress will pass Panetta's bipartisan bill before she sells her home to pay for her retirement.

"I'm kind of hanging on for that, quite frankly, and hoping they get it through," she said.

The former agent and producer, who requested partial anonymity to protect her privacy, bought her two-bedroom bungalow in 1994 for $245,000. A Zillow estimate reviewed by BI says the home is now worth about $1.3 million. She's weighing a slew of different factors in deciding when to downsize, including rising home insurance premiums and mounting home maintenance costs.

"I'm gambling," she said. "Do I wait for that big write-off? What happens if they don't insure houses anymore? Is that going to make the cost of my house go down?"