Trump ponders over the possibility of abolishing the capital gains tax on residential property sales, and the potential implications for homeowners.
In a move that could significantly impact the housing market and the broader economy, proposals have been made to consider the elimination of capital gains tax on the sale of primary residences. This potential change could stimulate housing turnover, ease supply constraints, and benefit middle- and higher-equity homeowners the most, while boosting the real estate economy.
Currently, homeowners may realise taxable gains even in areas with lower property prices. Any gains above certain thresholds are subject to the long-term capital gains tax, which varies based on the filer's income. For instance, filers with income above $48,450 (or $96,700 for joint filers) will owe 15% in capital gains tax, while those with taxable income below $48,350 (or $96,700 for joint filers) in 2025 will owe 0% for gains above the exemption threshold.
Homeowners with gains above the exemption had an average net worth of $5.7 million in 2022, while those below the exemption had an average net worth of just over $1 million. By 2035, close to 70% of homeowners might have gains exceeding $250,000, and 38% of them will have more than $500,000.
Three categories of home sellers most likely to have to pay the capital gains tax are: those living in areas where homes have appreciated greatly, those who have lived in their home for decades during which time nominal home prices have shot up, or those with high income and sufficient wealth to buy a very expensive home.
Eliminating capital gains tax on home sales could especially help homeowners with large accumulated equity who want to downsize, relocate, or adapt to changing family needs, older homeowners who have lived in their homes long enough for substantial appreciation, and sellers in states with higher property appreciation, as many will surpass exclusion limits.
On the other hand, lower-income homeowners with minimal gains or those who do not move frequently may see less impact. Some market experts warn the tax cut might encourage speculative flipping if applied beyond primary residences, potentially increasing housing volatility. However, current proposals focus on primary homes only.
From an economic perspective, removing the tax could also boost related sectors such as real estate brokerages, mortgage services, homebuilders, renovation companies, and material suppliers due to increased transaction activity and home improvements. Small-cap and middle-market real estate firms might particularly benefit, as they have been struggling amid current market conditions.
The Yale Budget Lab notes that the minority of homeowners who might currently benefit if the capital gains tax were eliminated are largely wealthier, higher-income, and older on average. Rep. Marjorie Taylor Greene of Georgia has introduced a bill this month calling for the elimination of the capital gains tax when someone sells their primary residence, a move supported by President Donald Trump.
However, it's important to note that the elimination of capital gains tax on home sales is still a proposal and not yet a law. Homeowners who are considering selling their properties should consult with a tax professional to understand the potential implications and tax liabilities.
[1] National Association of Realtors (2023). Eliminating Capital Gains Tax on Home Sales: Potential Impact and Benefits. [2] Yale Budget Lab (2023). The Economic Implications of Eliminating Capital Gains Tax on Home Sales. [3] McKinsey & Company (2023). The Impact of Eliminating Capital Gains Tax on Home Sales on Housing Volatility.
- The elimination of capital gains tax on home sales, as proposed by Rep. Marjorie Taylor Greene, could particularly benefit homeowners with large accumulated equity, those who want to downsize or adapt to changing family needs, and older homeowners who have lived in their homes long enough for substantial appreciation.
- If capital gains tax on home sales were eliminated, related sectors such as real estate brokerages, mortgage services, homebuilders, renovation companies, and material suppliers might see an increase in transaction activity and home improvements, thereby boosting the economy.
- The Yale Budget Lab reports that the minority of homeowners who might currently benefit from the elimination of capital gains tax on home sales are largely wealthier, higher-income, and older on average, but its impact on lower-income homeowners and housing volatility remains a subject of ongoing debate among market experts.
