Home Value Surge Sparks Capital Gains Tax Hit For More Sellers

Rapidly rising home values are enabling homeowners to accumulate wealth but they're also amplifying the impact of capital gains, as more properties exceed exemption thresholds when they're sold.

Like taxes applied to profits from stock and sales of other assets, home sales yielding profits less than $500,000 have been exempt from federal capital gains taxes since 1997.

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The interplay between increased home values and capital gains taxes changes the housing market dynamics, influencing buying and selling behaviors. Historically, only a handful of homes appreciated enough to surpass the $500,000 exemption threshold, but the trend has shifted, according to a CoreLogic report.

Last year, 229,600 homes in the U.S., accounting for 7.9% of all transactions, recorded gross capital gains of more than $500,000, potentially exposing sellers to tax obligations. It's a significant increase from two decades ago's 1.3% annual share.

Anne Russell, director of risk management at Rodeo Realty of Beverly Hills, California, told Realtor.com that the capital gains tax burden is so prevalent in some areas that many sellers are staying put.

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"With all of these exorbitant capital gains tax events for sales, many, many older Americans now are not selling because too much of that money will go to taxation and not enough to their heirs," Russell said. "Instead, they're aging in place."

Many homeowners hang onto their houses until they die because the cost basis of the home resets for whoever inherits the property. For example, if a home that was purchased for $700,000 many years ago sells for $1.2 million, it could trigger capital gains taxes as high as 20% for the seller. But if the homeowner keeps it until they die, the heirs may be able to sell it tax-free.

With more homeowners choosing to age in place rather than pay taxes on their gains, housing inventory is low, keeping the market competitive for buyers. Legislation proposed by U.S. Rep. Jimmy Panetta, a California Democrat, aims to change that.

Known as the More Homes on the Market Act, the bill would raise the capital gains exemption limit on homes and automatically raise the cap when inflation rises.

"There are many people who want to sell their homes but won't due to the hit they'll take on taxes," Panetta told Realtor.com. "The result is fewer people putting their homes on the real estate market can create housing shortages and housing affordability issues."

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