ALTA, Other Trades Warn Limiting Capital Gains Exemption Would Disrupt Housing Market
November 16, 2017
ALTA and 12 other trade associations warned the Senate that limiting the capital gains exemption would severely disrupt the U.S. residential real estate industry and the well-being of local communities.
Currently, homeowners can exclude from their taxable income up to $250,000 in capital gains ($500,000 for married taxpayers) from a sale of their primary residence. Under the proposals—to qualify for this break—homeowners must have owned and lived in their home for at least five of the last eight years. The current rule requires two of the last five years.
On Thursday, the U.S. House of Representatives passed a $5.5 trillion tax bill, which includes the provision to limit the capital gains exemption.
In a letter to Sen. Orrin Hatch, chair of the Senate Committee on Finance, and Ron Wyden, the committee’s ranking member, ALTA said this provision if enacted “will act as a disincentive for many homeowners to move up or move down as life events occur – expanding family, medical issues, job changes, and other life contingencies.”
“Among all proposed tax changes that will negatively impact housing and individual homeowners, the one that will affect the broadest segment of taxpayers, regardless income level, is treatment of their gain on sale,” the letter said. “Gain on sale is the individual equivalent to deferring capital gains for reinvestment. If these homeowners were investors, their capital gains could be deferred through tools we use to encourage growth, but under this proposal their tax liability is due in full, unless they go through a complex process to prove why they sold their home. That's not simplification and it is not fair.”
The letter points out that this change would be especially hard on millennials. For the fourth consecutive year, millennials were the largest group of homebuyers, and artificially reducing their ability to generate wealth will alter their desire to purchase a home or move up to a larger one.
“Subtracting 20 percent of the profit from the sale of a first home makes both the prospect and reality of moving up inside of five years financially impossible,” the letter states. “By locking younger households into their first homes longer, this tax law change will exacerbate the already tight supply of single family homes, driving prices out of reach for those entering the market.”
Contact ALTA at 202-296-3671 or communications@alta.org.