Homeowners are sitting on ultra-low mortgages, refusing to sell and deal with higher mortgage rates and few home listings to choose from. One Congressman says the solution is in D.C.’s hands.
California Representative Jimmy Panetta, a Democrat, whose district has some of the most expensive housing markets in the U.S., in March introduced legislation with Republican Congressman Mike Kelly from Pennsylvania that doubles the amount of money homeowners can exclude from declaring on their taxes when they make a profit on the sale of their home.
Under the “More Homes on the Market Act,” when a homeowner sells their home, they will be able to exclude $500,000 for single filers and $1 million for joint files when they file their taxes. It would also be indexed to inflation moving forward.
Currently, the legislation only allows for single filers to exclude $250,000 in gains and $500,000 for joint filers. The amount, set in 1997, has not changed in 26 years.
“It’s a pretty simple fix and a pretty straightforward bill,” Panetta told MarketWatch in an interview.
“‘Do I sell my home that has gained a tremendous amount of capital and then take a huge tax hit? Or do I just sit on it, and give it away?’”
Panetta’s congressional district stretches from South San Jose, all the way to Santa Cruz, down the Monterey County coastline, and all the way to the northern San Luis Obispo County area, he said. Homes in most of these areas typically cost about $1 million, according to the California Association of Realtors.
“A lot of people who have owned homes for a long time are in that position of deciding, do I sell my home that has gained a tremendous amount of capital and then take a huge tax hit? Or do I just sit on it, and give it away,” Panetta said.
He recalled meeting residents who had bought homes in the 1970s and 1980s who have seen their home valuations explode. A homeowner who bought a house in Santa Clara in 1997 for $300,000 has seen their home valuation rise to $1.8 million, Panetta said.
Other areas have seen similar increases in home values. “They’re just sitting in their homes that they’ve grown out of, and therefore not freeing up the market with these homes,” he said.
Panetta and Kelly’s bottom line: doubling the amount of money these homeowners can exclude as part of their tax bill would make it more attractive to sell.
“Doubling the amount of money these homeowners can exclude as part of their tax bill would make it more attractive to sell. ”
In a forthcoming study about the effect of taxes on housing supply, the National Association of Realtors projects that by adjusting capital gains exclusion for inflation since 1997 and increasing the exclusion amount to $450,000 for single filers and $900,000 for joint filers, the single-family housing market would see an increase in supply of between 159,000 and 344,000 homes nationwide. That’s roughly 39% to 85% of the average number of new monthly listings nationally in 2022. The NAR is putting out a study on the matter soon.
The squeeze in inventory is a big challenge to the housing market. “Home builders will provide additional supply, but that takes time and it may take multiple years,” Lawrence Yun, chief economist at the NAR, said on a call with reporters when discussing home sales for the month of April.
Increasing the capital gains exclusion amount is “something that could bring immediate supply to the market,” he added.
The current amount in capital gains that can be excluded from taxes was first set in 1997, and not indexed to inflation.
Jeff Tucker, a senior economist at Zillow
Cheaper housing markets where homes cost less may not see a big change, since they will still be able to avoid paying capital gains tax on up to $500,000 for joint filers.