A run-up in housing wealth has left some homeowners reluctant to sell.
Older American homeowners are sitting on a mountain of equity thanks to a historic post-pandemic run-up in home prices. The St Louis Federal Reserve reports U.S. homeowners of all ages are sitting on $32 trillion in home equity. Of that older homeowners 62 and older account for $14 trillion of accumulated housing wealth. However, some are choosing not to sell their home and downsize or relocate. Here’s one reason why…
Shannon Hicks
Editor in Chief: HECMWorld.com
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
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2 Comments
Is this alleged tax trap all that significant to a large percentage of Americans? Absolutely not! Let us look at a married couple with an exclusion of $500,000. How much is their income tax adjusted basis (ITAB) in the home? Just to get to the 20% federal tax rate on long-term capital gains would require the gain portion of the sales price to be over $584,000. Of course state income tax issues can come into play but the sales price would have to be almost $1.1 million without even looking at the ITAB which could be as high as another $1 million or more. So how many first time home buyers, do you think are being kept out of the home buying market because of homeowners who are being held hostage by this “tax trap?” For the highest federal income tax rate on long-term capital gains to have much of an impact on the couple would require a sales price of about $3,000,000 or more.
The author of the underlying article sounds like he wants to sell his own home but would only do so if his potential income tax bill was substantially lower. While increasing the gain exclusion may be sound on its own merits, trying to get it increased using this rationale ALONE should be met with a resounding “NO!” It is an example of the arguments used by the almost affluent and affluent in trying to get lower federal income taxes on specific income tax provisions impacting them.
An interesting vlog on the basic idea of raising the exclusion amount but hardly the sympathetic tearjerker most likely intended by the author of the underlying article.
The article relates to a very small segment of Americans. I live in Los Angeles County. Here driving from San Diego to Santa Rosa and staying within a width of 30 miles from the coast lie a disproportionate number (as to the population of the state) of the homes with the dollar value the article addresses. That area is less than 10% of the land mass in California and even most homes in that land mass do not have the homes values the author speaks of.
The article addresses not the value of the property itself but the gain and, yes, the long-term capital gain (LTCG) that would result from the sale of such property The author does not separate the homes into 1) principal residences versus 2) a)retirement homes held before retirement, b) vacation homes, c) rentals, d) third, fourth, fifth, or even sixth homes, e) etc. It incudes SFRs, condos, coops, and a few manufactured homes. It is an article to which a question needs to be posed: who cares?
In my neck of the woods, the vast majority of these homes are owned by people who file joint income tax returns with their spouse. Because of the size of the lowest amount of LTCG potentially resulting from the sale of the home, the homes are far most likely to be owned by seniors.
So let us focus on the homes and their owners. Just to reach the level of the federal income tax rates on LTCG where these rates impact joint filers is about $600,000. Add to that the size gains that the author alludes to probably is adds at least another $400,000 or more. So the LTCG is over $1,000,000. Add to that the $500,000 exclusion and the LTCG before exclusion is most likely over $1,500,000. Now add to that, the adjusted basis of the home for federal income tax purposes which was subtracted from net selling price to arrive at the LTCG and the related sales cost plus any depreciation taken on that property and the gross sales price is in all likelihood at the bottom of the range of the current value of these homes about $2.3 million.
So how much sympathy is there for the tax problems of these couples? Even those who only are eligible for the $250,000 exclusion would have to have a home value of around $1.75 million. Does anyone actually believe that a federal income tax liability reduction of between $100,000 and $130,000 is sufficient to get those with a home worth $5,000,000 to sell? How would such a sell impact the inventory for first time home buyers?
I am holding the world’s smallest violin and playing a song of sympathy…. The underlying article is interesting in its argument why this particular exclusion should be increased but once basic facts are known, the article does not garner much sympathy for the plight of the homeowners who would be most impacted by an increase in the exclusion.