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Boomers wanting to downsize face huge tax bills

After 33 years and four children, Baby Boomers Marta and Octavian Dragos say they feel trapped in what was once their dream home in El Cerrito, California.

Both over 70, the Dragos are empty nesters, and like many of their generation, they’re trying to figure out how to downsize from their 3,000-square-foot, five-bedroom home.

“We are here in a huge house with no family nearby, trying to make a wise decision, both financially and for our well-being,” said Dragos, a retired teacher.

But selling and downsizing isn’t easy, appealing or even financially advantageous for many homeowners like the Dragos family.

Many Boomers whose homes have surged in value now face massive capital gains tax bills when they sell. This is a kind of tax on the profit you make when selling an investment or an asset, like a home, that has increased in value.

Plus, smaller homes or apartments in the neighborhoods they’ve come to love are rare. And with current prices and mortgage rates so high, there is often a negligible cost difference between their current home and a smaller one.

161 comments

  • Whatever. They just don't want to pay anything. Probably bitch about the real estate agent fees, too. They're only trapped by their own greed.

  • Fewer older homeowners selling is part of what is keeping the inventory of homes historically low and pushing prices ever higher in markets across the US. Empty nesters of this age own more larger homes — three bedrooms or more — than Millennials with kids do.

    Dragos said she understands that, as homeowners, theirs are enviable problems. They own an asset that has soared in value, after all.

    But as she and her husband sit at their dining table discussing the morbid math — what is left after capital gains taxes, what happens if he dies first, what if she goes before him — she says they see no good options for how to get out from under their home while keeping an acceptable amount of profit from its sale, which they’d like to use to fund their retirement.

    This is the problem. People trying to sell large, expensive homes for something smaller and have any appreciable difference in cost. No one is going to sell a 3,000sqft house for a 1,200sqft condo just to break even. They'll just stay in their big homes and the housing market will continue to be fucked.

    This is really only an issue right now in high COL areas where people are trying to change homes, not sell second homes for profit.

    Most homeowners don’t have to pay capital gains on their home when they sell. Thanks to tax legislation from the ’90s, a gain of up to $250,000 for a single tax filer or $500,000 for a couple filing jointly is exempt from tax.

    This is so when someone tries to change homes, they don't lose most of their equity. This exemption only applies to primary residences, so people speculating with homes don't benefit. The issue is that exemption ceiling has not kept pace with the massive inflation in high COL areas. Which further restricts the amount of homes for sale in those areas, driving up prices, etc.

    A homeowner who keeps all the profit of a home that sells for $500,000, for example, may find that a condo in their same area, where they can age in place, is $450,000. After calculating realtor fees and closing costs, the profit hardly covers the new purchase, let alone provides any extra income for retirement.

    No one will downsize if there's no real benefit. This will freeze the housing market.

  • This is part of a growing class of "house rich, cash poor" people.

    They can't afford to move because the sale price of their existing (oversized) houses would not be enough to buy existing stock of smaller houses, in spite of the crazy market. The old houses they live in are increasingly in exurbs or even age-restricted communities that the kind of new family that might need a house that size can't be in for totally different reasons.

    Plus they might want to stay in that community. Maybe that's where their friends or family are. Their doctors. All that kind of stuff. And it's not unreasonable for a person to want to keep living where they have a social network.

    They also can't rent out rooms or ADUs because local zoning laws arbitrarily forbid it either directly or by enforcing things like minimum parking requirements that are not achievable. Which would be one great way to increase housing supply and let people stay where they are; turn extra space into more housing. But these boomer houses tend to be in the most restrictive type of suburbs that stifle the rights of the homeowners and prevents sustainable growth.

    They increasingly don't have pensions because those disappeared in their lifetimes. Retirements funds got fucked by a variety of financial catastrophes in the intervening years, so they're increasingly relying on social security checks to pay for their (mandatory) car, big ass house expenses, and all that stuff. They're living well above their means and even if they realize it and want to make a change, the actual ability to do so is a massive problem.

    The net result of this situation is even more tightness in the housing market. Even less real stock, since the ability to downsize is so lousy.

    This thread has a sure lot of angry people and boomer hate in it. Which I get, but this is all part of the same housing problem with the same solutions -- more low-cost/smaller homes need to be built and fewer restrictive codes/zoning rules preventing common-sense housing. A lot of people want to develop the properties that people want to buy, but city policies are often the biggest obstacle to them -- that and lack of financial products to fund development thanks to the gradual snuffing out of local banks.

161 comments