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Changes to Capital Gains Taxes Could Radically Alter the Calculus for Home Sellers

by Dalton Herring on January 29, 2018

Selling the median U.S. home after four years of ownership would mean $2,363 in taxes, from $0 currently.

The U.S. House and Senate have changed the residency requirement to five of the past eight years – a change that, had it been enacted last year, would have affected 11 percent of U.S. home sellers. Were these laws enacted, an owner of the nation’s median-valued property ($202,700 as of September) that decided to sell after four years – a year shy of the five-year rule currently proposed – would have a capital gains tax bill of $2,363, compared to $0 currently. Put in context, assuming that buyer was to turn around and again buy a median-valued home, that could be the difference between having a roughly 9 percent down payment versus a 10 percent down payment.

The impact would be far greater for similarly short-tenured home sellers living in pricey and/or rapidly appreciating areas. Owners of the median home in Palo Alto, one of the nation’s most expensive cities, selling their home after four years would owe $97,200 in capital gains tax under the new law, a $75,000 increase over current law or 2.8 percent of the current median home value in Palo Alto. In Dallas, a much more affordable city than Palo Alto but one in which home values are growing quickly each year, the owner of the area’s median home that chose to sell after four years would pay capital gains taxes to the tune of $7,537. This could mean the difference between a 15 percent down payment and a 20 percent down payment on the typical home in the city of Dallas.

Home sellers could and likely will change their behavior in order to avoid the new capital gains taxes, since delaying the sale of a home until they reach the five year requirement might be worth the money. How much this proposed policy change may affect inventory in the coming years remains to be seen, but the impacts could be substantial. While the typical home seller has lived in the home they’re selling for at least 12 years, 11 percent sell after living in the property between two and five years.[1] If these homeowners decide to wait and not sell, the already tight inventory situation could get worse, potentially causing prices to go up if demand remains high. On the flip side, because the bills are written to impact sales beginning on Jan. 1 2018, if passed many would-be sellers may be tempted to move their timeline forward and list their home for sale in coming weeks in hopes of avoiding a tax. This could have the effect of causing a glut of listings, however temporary.

By Skylar Olsen at Zillow.com


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