“$0 Tax On ALL Profits!” - This NEW Housing Market Proposal Is INSANE
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$0 TAX ON HOME SALE PROFITS?
There are discussions around dramatically expanding the capital gains exclusion when Americans sell real estate, including the possibility of allowing homeowners to exclude as much as $1 million in profit. If something like this became law, it could have major consequences for homeowners, investors, buyers, sellers, and the entire housing market.
THE CURRENT CAPITAL GAINS EXCLUSION
Right now, homeowners can generally exclude up to $250,000 of capital gains when filing single, or $500,000 when married filing jointly, as long as they owned and lived in the property for at least two of the previous five years. Those limits were established in 1997 and have never been indexed to inflation, even as home prices have increased substantially.
WHY THE $500,000 LIMIT MATTERS
For longtime homeowners in expensive markets, the existing exclusion can leave a significant amount of appreciation subject to federal capital gains taxes. Simply adjusting the original $500,000 married exclusion for inflation would put it at roughly $1 million today.
COULD INVESTMENT PROPERTIES QUALIFY?
This is where the potential impact becomes much larger. Rental properties generally do not qualify for the primary residence exclusion unless the owner satisfies the residency requirements. If lawmakers ever extended a large capital gains exclusion to investment properties, millions of landlords could suddenly have a major financial incentive to sell.
MILLIONS OF RENTALS COULD HIT THE MARKET
There are roughly 49 million rental units throughout the United States. If even a small percentage of investors decided to sell because of a temporary tax incentive, the resulting increase in inventory could be substantial, especially in investor heavy markets such as Las Vegas, Phoenix, Tampa, Atlanta, and Dallas.
WHAT THIS COULD DO TO HOME PRICES
More inventory means more competition among sellers. In markets where supply begins exceeding buyer demand, sellers may have to lower prices to attract buyers. If landlords are also receiving a large tax benefit from selling, they could be more willing to accept lower offers while still walking away with more money after taxes.
WHO WOULD BENEFIT MOST?
The biggest immediate beneficiaries would likely be longtime homeowners with substantial appreciation, particularly in expensive housing markets. Buyers could benefit from increased inventory and potentially lower prices. However, homeowners without large gains could face more competition, while some renters could be displaced if landlords decide to sell.
THIS IDEA ALREADY EXISTS IN CONGRESS
The bipartisan More Homes on the Market Act would double the current primary residence exclusion to $500,000 for individuals and $1 million for married couples while indexing the limits to inflation going forward. Other proposals have suggested eliminating the caps entirely.
COULD THIS ACTUALLY PASS?
Tax legislation can potentially move through budget reconciliation with a simple Senate majority, but there are major restrictions involving deficits and long term costs. That makes any major new tax break complicated and potentially temporary.
INVESTMENT PROPERTIES ARE STILL SPECULATIVE
As of now, there is no existing bill in Congress that would give every investment property a $1 million capital gains exclusion. Most concrete proposals currently focus on increasing the exclusion for primary residences.
WOULD THIS FIX HOUSING?
Expanding the exclusion could encourage more owners to sell and temporarily increase housing supply, but it would not solve the underlying shortage of homes. The larger long term issue remains housing construction, development costs, zoning, labor, and the ability to build enough homes to keep pace with demand.
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