Inflation is pricing many citizens out of the housing market. Home prices have increased more than 50% since the start of the pandemic. The median age of first-time home buyers is 41, the highest on record.
There is a simple solution to the housing crisis. President Trump has floated the idea of eliminating capital gains on home sales. A more ambitious agenda would eliminate capital gains taxes on owner occupied homes entirely. This is in fact what Canada has done, homeowners in Canada are exempt from paying tax on the profit from the sale of an owner-occupied home.
Eliminating capital gains taxes on the sale of owner-occupied homes at the federal level is straightforward. Currently homeowners can take advantage of rules that allow them to exclude a portion of capital gains taxes on their homes from federal income taxes. When a homeowner dies heirs can use the ‘Angel of Death’ loophole. When a home is inherited the heirs can adjust the value of the home to market value, eliminating capital gains on the home from federal income taxes. While the capital gains taxes on the sale of owner-occupied homes account for a small amount of federal revenue, they impose a heavy burden on homeowners to keep financial records and qualify for the exemption. President Trump could eliminate that burden with the stroke of a pen.
At the local level homeowners have been hit with inflationary increases in home prices and property taxes. Homeowners must pay property taxes on the unrealized capital gains in the value of their homes. There is no escape from property taxes on these unrealized capital gains, nor an ‘Angel of Death’ loophole to provide relief from this capital gains taxation upon the death of the homeowner. High property taxes on top of increased cost of home insurance and other housing costs are literally taxing citizens out of their homes. Unrealized capital gains taxes on owner-occupied homes at the local level could be eliminated by fixing the assessed value of the home at the market value when purchased for as long as the owner occupies the home.
Critics of proposals to eliminate unrealized capital gains taxes on owner occupied homes argue that this will benefit billionaires. The U.S. has the highest number of billionaires in the world with 902 of them. If these billionaires would take advantage of eliminating taxes on the capital gains in their homes, I suspect that this would have a negligible impact on their net worth. Nor would this have much impact on state revenues. Meanwhile millions of homeowners must cope with unrealized capital gains taxes on their homes, which does have a significant impact on their American Dream of Affordable home ownership. If critics are concerned about inequalities in wealth, there are better ways to redistribute income and wealth than cumbersome and costly capital gains taxation of owner-occupied homes.
Eliminating unrealized capital gains taxes on owner occupied homes would have a significant impact on my family’s net worth. My wife received a modest inheritance from her parents that included a home. She used that inheritance to help our two daughters, who are single moms, purchase a home. But inflation has increased the cost of home ownership for them, they live in an area that has experienced a significant increase in home prices and property taxes. They must pay property taxes on unrealized capital gains in their homes, and we have helped them pay higher costs. Without our help they could not have purchased their homes or paid for the high taxes on unrealized capital gains in their homes.
There are millions of citizens like us who are not wealthy, but who must bear the costs of inflationary increases in property taxes and capital gains taxes on our homes. Eliminating taxation of capital gains on our homes could help to preserve the dream of homeownership, especially for younger generation. Investment in a home should be treated the same way that we treat investment in a retirement account. When our homes are inherited the value of the home should be adjusted to market value, eliminating any taxes on capital gains on the home.
There is a fundamental proposition in economics, if you tax something more you will get less of it, if you tax it less you will get more of it. Eliminating taxes on unrealized capital gains in owner-occupied homes will decrease the costs of home ownership and increase the number of citizens who can afford a home, especially in younger generations. If we want to solve the housing crisis, we must stop taxing citizens out of their American Dream of affordable home ownership.
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