Lawmakers Push for Capital Gains Tax Exclusion

Lawmakers and government officials say they're making progress on an update to the capital gains tax.

Right now, America’s homeowners are sitting on a staggering $34.7 trillion in equity, built up during a decade of rising home prices and historically low interest rates.

At the National Association of Realtors® advocacy week in Washington, DC, officials said they're narrowing in on ways to update the capital gains tax scheme in a bid to encourage more long-term homeowners to sell without being slapped with a huge tax bill.

And the effort is bipartisan, leaders said, even as some big housing bills remain stalled.

"Roughly a third of all homes that could be on the market could be subjected to that tax and it's locking people in," Shannon McGahn, NAR's chief advocacy officer, said at the event. "It's great to see that there's bipartisan support."

Frank Cassidy, commissioner of the Federal Housing Administration, said the market needs both deregulation and pro-transaction policy. But the FHA takes direction from Congress, which would have to act to alter the cap.

"The more transactions we can have going on in the private sector, and the more we can incentivize the supply side, is what will really have long-term effects," said Cassidy. The FHA oversees the Department of Housing and Urban Development's $2 trillion in mortgage insurance programs.

Growing concern over outdated tax scheme

Congress set the current capital gains scheme in 1997. Sellers can exclude up to $250,000 in profit if single, or $500,000 if married and filing jointly, when they sell a primary home, with few strings attached.

But the law didn't include adjustments for inflation. As home prices have appreciated in the years since, homeowners see a mounting impact. The longer the value of their home appreciates, the larger the cut the federal government can take as a capital gains tax when they do sell.

That causes large tax bills, especially for those who have stayed in their homes the longest. Or, those who live in areas where home prices have grown the fastest.

Last year, NAR estimated that 29 million American homeowners (1 in 3), have built up more home equity than the capital gains exclusion. It expected that number would grow to 56% by 2030.

'Center-of-America issue'

Rep. Jimmy Panetta, a California Democrat on the House Ways and Means Committee, reintroduced a bill late last year to double the exclusion. That would mean $500,000 for single filers and $1 million for couples.

The More Homes on the Market Act now has 94 cosponsors—58 Democrats and 36 Republicans. President Donald Trump voiced support for a more drastic bill to remove the capital gains tax last summer.

But Panetta's bill stalled out twice before. He said the concept is gaining traction in bipartisan subsets of Congress, like the Problem Solvers Caucus, of which he's a member.

He also said his idea is both more "reasonable and realistic" than ending capital gains entirely. There is interest on both sides of the aisle for how to tweak the bill, though it's expensive.

Both the Senate and House presented comprehensive housing bills last year. While the House's stalled, it leaves room for capital gains to be debated during a reconciliation process this year.

"This isn't just a coastal issue anymore," Panetta said of housing inventory strain. "This isn't just a blue state or blue congressional district issue. This is a red issue. It's a center-of-America issue, and I think that's why we're getting more and more momentum."

Seniors are motivated to downsize—but can't

An across-the-board raise of the capital gains tax threshold is ginning up resistance because of how much revenue it would cost the government, said Jim Parrott, a nonresident fellow at the Urban Institute.

Instead, it seems more palatable for an exclusion specifically for seniors 65 and older, for instance. They are already motivated to downsize, and the homes they occupy would be ideal for the young families who need them.

Arthur Gailes, research fellow of the American Enterprise Institute, estimated 4 million to 9 million seniors could benefit from capital gain adjustments, but "in the scheme of affordability that just doesn't matter that much."

"It's not an overwhelming thing that's going to solve grand problems, but it would break up a logjam in the market and that could be helpful," Parrott said. "And it's targeted enough it wouldn't be that expensive."