Capital Gains Tax Discourages Homeowners From Selling, Senate Hears

The Senate heard testimony on Tuesday regarding federal taxes on the profits from home sales, which industry advocates say could be discouraging millions of homeowners from selling.

Kevin Brown, president of the National Association of Realtors®, urged Congress to raise the exclusion limits on capital gains taxes for home sellers, which currently kick in at $250,000 in profits for single people and $500,000 for joint filers.

NAR wants to see those limits doubled, which would make profits of up to $1 million for married home sellers exempt from capital gains taxes. Testifying before the Senate Committee on Banking, Housing and Urban Affairs, Brown said the higher limits would expand available housing inventory by encouraging more homeowners to sell.

"Just like people were locked into their homes at lower interest rates, seniors are often locked in because of the home equity penalty," Brown said. "This legislation expands existing housing stock and gives seniors the opportunity to tap equity that they have counted on for retirement."

"In turn, move-up buyers can then buy homes, thus freeing up houses for first-time homebuyers," Brown said to Senate Banking, Housing, and Urban Affairs Committee Chair Sen. Tim Scott (R-SC).

Capital gains limit for home sales unchanged since 1997

The current code, set in 1997, taxes profits from home sales at up to 20%, if they exceed the limit of $250,000 for single people and $500,000 for joint filers.

Because the capital gains tax exclusion wasn't tied to inflation, many more homeowners today face a tax hit than they would have three decades ago. Typically, the longer they own the home, the larger the bill.

"There are people on the sidelines right now, just waiting, because they either don't want to pay their tax or can't afford to pay a tax," Brown testified.

NAR has estimated that nearly 13 million homeowners would face a tax penalty if they sold their homes today. Brown argued that raising the exclusion limits would help free up housing inventory at a time when the country is facing a major supply crunch.

"That would free up inventory; you don't have to put any shovels in the ground," Brown said. "There would be instant inventory into the marketplace, where buyers would come in, buy their property, which would free up some housing for first-time homebuyers."

Last year, Realtor.com® reported that 1 in 3 homeowners now has more equity than the exclusion threshold protects for single filers. That exposes many families to a potential capital gains tax penalty upon the sale of their primary residence.

Capital gains reform draws more support on Capitol Hill

Rep. Jimmy Panetta (D-CA) introduced the More Homes on the Market Act, a bill to double the current home sale exemption to $500,000 for individuals and $1 million for couples. 

As of now, it has 126 co-sponsors, 75 Democrats and 51 Republicans. Endorsements have continued to trickle in over the past several weeks on the bill. That includes many in the large and bipartisan Real Estate Caucus. But the bill remains stuck in committee.

Panetta has acknowledged the bill faces a political challenge because it's costly to the federal budget. Government analysts estimated doubling the scheme could cost $46 billion in tax revenue. More targeted changes, such as an exception for seniors, still amount to billions in forgone revenue.

Lobbying for changes to the capital gains tax scheme was a major priority for NAR's meetings with legislators last week. Shannon McGahn, chief advocacy officer of NAR, said last week Congress may have an appetite to take it up later this year.

"Nothing's going to get more homes on the market as quickly as ensuring that there's not an unnecessary capital gains (tax) placed on them," McGahn said.