This boomer couple would be hit with $700,000 tax bill if they sold their mansion
This boomer couple would be hit with $700,000 tax bill if they sold their mansion
This boomer couple would be hit with $700,000 tax bill if they sold their house
Joel and Kathryn Friedman, both 71, are counting the days until they can sell their home and move into a 55-plus community.
The retired empty-nesters have been ready to downsize for years, but are reluctant to sell their five-bedroom, 5,000-square-foot Southern California house [mansion] in large part because of at least $700,000 in capital gains taxes they estimate they'd have to pay.
Since 1997, home sale profits over $500,000 (for married couples) and $250,000 (for single filers) have been subject to a capital gains tax of up to 20%. That threshold hasn't changed since 1997, meaning that — between inflation and soaring home prices pushing an ever higher number of houses above that limit — many more home sellers have to pay the tax now than when it was first implemented.
The Friedmans are among a growing number of older homeowners discouraged by the tax from selling their valuable properties. Housing economists say that dynamic has exacerbated a shortage of family-sized homes on the market, especially in expensive places like California.
The Friedmans' house is too big for them, and maintenance costs are only rising, Joel said. "There are a million reasons why we'd like to move, but we're not because the tax is just burdensome," he said.
But that could change — there's bipartisan support in Congress for raising the federal tax threshold to boost home sales in a stagnant market.
Everyone in here is ripping these people and ignoring their actual situation and the problem it creates for all of us.
If their profit is that high, they bought decades ago, when the price of a home like this was in the reach of a normal high paid professional. Decades later after raising kids, paying for college, and saving normally, they might not be wealthy, or even rich in cash and investments. This house might be a large majority of their net worth. And guess what? Anywhere they want to move is going to have had the same crazy inflation as their current home. Why would they sell when, after taxes, any place they buy with what's left will be a major step down.
And for their specific example, 55-plus communities usually sell for much less per sqft because they come with huge HOA fees to fund all their amenities. Generally people expect to pay these fees with the difference between the sale of their old home and the new one. They might not be able to afford the HOA fees after taxes.
They've got two choices: They can sell and either make up the taxes with their savings, drastically reducing their standard of living (if they're even able to do that, don't forget if they take 700k out of a 401k all at once they'll get wrecked in taxes that year) or move somewhere shittier with the after tax proceeds. Or stay in their too large home, keeping it off the market. Edit: I forgot a commonly used option; keep the old place, rent it out and charge enough to pay the mortgage on the new place and property tax, HOAs, and maintenance on both (and why not a little profit too?), further fucking the market.
Empty nesters staying in their family homes keeps them off the market driving up the costs for young families and everyone else in the market as a whole.
As far as a solution goes, I'm not a fan of a larger exemption. I would advocate a special account for home sale profits, kind of like an HSA or a 529, that could only be used tax free for qualified expenses like purchasing a home, property taxes, and HOAs. But anything that encourages older people to leave their too-large homes for something more suitable would help the market for everyone.
If you can't get past "boo hoo rich people problems," cut the numbers in half, or more. The problem persists. In California a profit in excess of 500k (250k for a single person) after decades of living in a modest family home is not at all rare. Many normal people who are not rich by any stretch find themselves in this situation.
My MiL was in this exact situation (selling and moving to a 55-plus community), and she is not rich. To make the numbers work I had to make her investments higher risk/higher reward than they should be for her age to allow for larger withdrawals. Luckily she has my wife and I to make up the difference if it goes tits-up, but not everyone has that luxury.