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The American dream of homeownership has been a way to build wealth for decades as people pay down their debt while their homes appreciate in value. The result is a nice home equity nest egg — especially for seniors who have owned homes for many years.
But an outdated tax law could claw back much of these gains when seniors go to sell their properties, as a recent Realtor.com article points out.
The home equity tax is just that — what you have to pay the IRS when you go to sell. It was originally meant to shield middle-class homeowners from being taxed like they were wealthy.
But the law hasn’t been updated since 1997, which means single seniors can exclude up to only $250,000 in capital gains from the sale of a primary residence, while married couples can exclude up to $500,000.
That sounds like a lot until you consider how much homes have appreciated in the past 28 years. In 1997, the median U.S. home price was $145,000 — but today, that figure has climbed to $360,239.
Realtor.com notes that if the law had kept pace with inflation, “the cap would be more than double today: around $660,000 for individuals and $1.32 million for couples, according to research from the University of Illinois Chicago.”
The home equity tax applies to all sellers, not just seniors, but it affects older Americans more than other groups because of how long they’ve often owned their homes.
“This issue disproportionately affects seniors simply because of bad timing. Older homeowners are more likely to have lived in their homes for decades, which means they’ve built up more equity. Likewise, many have already paid off their mortgages, so there’s little debt to offset those gains,” the article explained.
Ironically, states with high property values and strong long-term house-price appreciation — the very places that buyers find attractive — are where home sellers get hit hardest.
The five states with the highest average senior tax liability on home sales, according to Realtor.com, are:
- Wyoming: $105,201
- Hawaii: $91,664
- California: $86,215
- Washington, D.C.: $82,721
- New York: $70,493
Unless the law is updated to reflect current realities, the tax liability when they sell will eat more of the home equity that middle-class owners, including seniors, have been counting on.
According to a recent study by the National Association of Realtors, more than 8 million homeowners exceed the $500,000 cap. By 2030, eight states will have more than 40% of their homeowners with equity above the $500,000 cap — and by 2035, that number would increase to 20 states, the study claimed.
In all, NAR said that 29 million homeowners today (34%) could face capital gains taxes if they sell and have equity above the $250,000 exclusion cap. The trade group projects that number to climb to 59 million (70%) in 10 years.
But help might be on the way. Last week, President Donald Trump said he was considering legislation that would eliminate the capital gains taxes on primary residences. The legislation was proposed by Congresswoman Marjorie Taylor Greene (R-Ga.)
Republicans threw homeowners in wealthier areas a bone this year when they passed the One Big Beautiful Bill Act, which includes an increased cap on state and local taxes to $40,000, up from $10,000.
Does the author understand that home equity and the exclusion of gain on a principal are unrelated? Here is what is said in one of the paragraphs above:
“According to a recent study by the National Association of Realtors, more than 8 million homeowners exceed the $500,000 cap. By 2030, eight states will have more than 40% of their homeowners with equity above the $500,000 cap — and by 2035, that number would increase to 20 states, the study claimed.”
Not long ago friends of my wife and I took their net sales proceeds from their home in a California beach town and bought a home in an upscale neighborhood in south Orange County. Let’s say they bought it for $2,000,000. So they start with a beginning equity of $2,000,000. The home is worth about $2,600,000 today. If they sold it their sales costs would be about $150,000, leaving them with about $2,450,000 in projected net sales proceeds.
So in this case, what would their capital gains be? Not their home equity of $2,600,000 after selling costs). It would be just $350,000; their net sales proceeds minus their adjusted basis in the home of $2,100,000 that includes $100,000 in home improvements.
As a California licensed CPA, California real estate broker with an NMLS license, I see alot of such nonsense. These arguments are full of emotion and not so rational thought. Look at the law, the related primary sources, and regulations. The intention of Congress in 1997 (which knew far more about inflation than we do today) was to ignore its impact on the exclusion. WHAT compelling reason is there to further reduce revenues to the Treasury or perhaps Medicare benefits should be reduced for this tax reduction as well. And while we are at it, we need to provide some kind of tax subsidy to renters (the minority here) to offset thie potential gift to the more advantaged in our society as well.