Long-Time Homeowners in Pricey Places Benefit Most from Potential Changes to Capital Gains Taxes
Long-time homeowners in a handful of pricey communities – concentrated primarily in the California Bay Area, Los Angeles and New York – looking to sell their home soon would be the primary potential beneficiaries of a recent proposal to index capital gains tax exemptions to the rate of inflation.
When Americans sell any asset – including one’s home – they are liable for federal (and sometimes state) taxes on the capital gains. Tax laws allows for a certain threshold of tax-free capital gains. For married taxpayers filing jointly, that exemption is currently $500,000 ($250,000 for single taxpayers), meaning if the proceeds from the sale of one’s home are less than $500,000, the seller pays no tax. If the sale proceeds exceed $500,000, the seller is liable for taxes on the proceeds above and beyond the exemption threshold.
One common criticism of the capital gains tax exemption is that it is not indexed to inflation, meaning that as home values rise – as they generally do – more home sales will be subject to the tax. Recent proposals in the nation’s capital would index the exemption threshold to the overall rate of inflation.
Long-time homeowners in pricey communities where home sales more commonly net very large capital gains would be the primary potential beneficiaries of this change.
Zillow analyzed 1,316 cities nationwide, and assumed a married homeowner was selling a home in that city after having owned it for 20 years.[1] Indexing the capital gains exemption to inflation would reduce the capital gains tax liability for homeowners in 225 (17 percent) of these cities. Over half of these cities are in the California Bay Area (55 cities in the San Francisco metro area and 20 cities in the San Jose metro area), Los Angeles (41 cities) and New York (40 cities). Home sellers in some pricey suburbs of Seattle, Boston and Miami also stand to benefit.
The median home value in July 2018 across cities where home sellers would potentially benefit from the change is $1,297,150, compared to $552,700 across cities analyzed where the change would not affect the typical home seller. For the typical home seller in cities that stand to benefit from the change, indexing the capital gains exemption to inflation would reduce their tax bill on the order of $25,700.
The chart below shows cities where a typical home seller would potentially benefit from the proposal to index the capital gains tax exemption to inflation, and the dollar value of the typical tax savings.
[1] Our baseline estimates assume a married taxpayer owning the median home in each city, purchased in June 1998 and sold in June 2018, with a capital gains tax rate of 15 percent, less total renovation costs (0.5 percent of the purchase price in the first year and indexed to the Consumer Price Index for each year thereafter) and selling costs totaling 8 percent of the sale price (commissions and transaction fees).