A Republican lawmaker is proposing a major tax break for some homeowners, arguing that outdated tax rules are preventing many older adults from selling homes they’ve owned for decades.
The “Nest Egg Protection Act” would temporarily increase the federal capital gains tax exclusion to $1 million for qualifying homeowners age 65 and older who sell their primary residence.
Under current law, homeowners can exclude up to $250,000 in gains from the sale of a primary residence, while married couples filing jointly can exclude up to $500,000.
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But… those thresholds were established in 1997 and haven’t been indexed for inflation, despite increases in home values over the past three decades.
The bill’s sponsor, Rep. Nicole Malliotakis of New York, says many older Americans are effectively trapped in homes that no longer meet their needs because selling could trigger a significant tax bill.
“By removing this tax barrier that discourages seniors from selling when they want to, we can protect their nest egg while making the American Dream of homeownership more attainable for younger families and first-time homebuyers,” Malliotakis said in a release announcing the legislation.
Curious? Here’s more of what you need to know.
New $1 million home sale tax break for seniors?
According to Malliotakis, the proposal is intended to help seniors preserve the equity they have accumulated over decades while also encouraging downsizing that could free up housing inventory for younger buyers.
- To qualify under the proposal, those over age 65 would need to have owned their home for at least 25 years.
- If approved and enacted, the enhanced exclusion would apply from tax years 2027 to 2030.
The bill comes as lawmakers from both parties have increasingly focused on capital gains taxes as a factor contributing to housing market gridlock. (You may recall proposals last year to eliminate capital gains taxes on home sales.)
Housing advocates and economists often refer to the issue as a “lock-in effect,” where homeowners delay selling, in part because of the tax consequences associated with large gains.
- Older adults and long-term homeowners often choose not to sell their homes because they represent a source of financial stability.
- Particularly for those who have paid off their mortgages, selling often means facing higher costs elsewhere due to today’s elevated mortgage rates.
- Additionally, in many cases, their homes hold substantial equity, which they may want to preserve as an emergency resource, through reverse mortgages, or to pass on to loved ones.
The result can be fewer homes available for sale, particularly in high-cost markets.
Who benefits from a higher capital gains exclusion?
As Kiplinger has reported, data show that in recent years, approximately 8% of home sales resulted in gains that exceeded the home exclusion threshold. That’s more than double the percentage five years ago, according to a report from CoreLogic, a company that provides consumer information and analytics.
Supporters say that increasing the exclusion amounts would make it easier for retirees to relocate closer to family members, move into smaller homes, or transition into assisted-living communities without sacrificing a portion of their nest egg to taxes.
Another argument is that additional housing supply could help ease affordability pressures in some markets.
Critics, however, question whether such a measure would disproportionately benefit homeowners in higher-value markets who have generally seen the largest appreciation gains.
- According to research from the Yale Budget Lab, only about 10 to 15 percent of homeowners have capital gains on their primary residences that exceed the current federal tax exclusion limits.
- These are typically wealthier and older folks, with homes averaging $1.4 million and capital gains above the exemption at around $430,000.
Some tax policy analysts have also warned that expanding (or eliminating) capital gains exclusions could reduce federal revenue.
Capital gains exclusion on primary residences: Bottom line
The legislation has been referred to the House Ways and Means Committee and will likely face a lengthy path through Congress. But if eventually approved, it would represent one of the most significant targeted tax benefits for homeowners in recent years.
For now? The capital gains tax break for homeowners remains at $250K for singles and $500K for those married filing jointly.
To be eligible for the exclusion, you must have owned and used the home as your primary residence for at least two of the five years leading up to the date of the sale.
The IRS allows you to have only one “primary residence” at a time, and uses various factors to determine whether a home qualifies.
If you’re thinking about selling your home, it may be a good idea to consult with a certified financial planner or tax professional who can consider your situation and help evaluate any capital gains tax implications.
