N※N

Why cutting capital gains tax on home sales wouldn''t solve the country''s housing issues

Why Cutting Capital Gains Taxes on Home Sales Won't Fix America's Housing Woes

In the midst of America's escalating housing crisis, where skyrocketing prices and dwindling affordability have left millions of potential buyers on the sidelines, policymakers and economists are scrambling for solutions. One idea that's gained traction in certain circles is slashing the capital gains tax on home sales. Proponents argue that reducing this tax burden would incentivize more homeowners to sell, flooding the market with inventory and easing the supply crunch that's driving up costs. But a closer examination reveals that this approach is more of a Band-Aid than a cure, unlikely to address the root causes of the nation's housing shortages. In fact, it could exacerbate inequalities without meaningfully boosting supply or making homes more accessible to everyday Americans.

To understand the proposal, it's essential to grasp how capital gains taxes work in the context of real estate. When homeowners sell their primary residence, they often realize a profit—or capital gain—based on the difference between the purchase price and the sale price, adjusted for improvements and other factors. Currently, the federal government offers a generous exclusion: single filers can exclude up to $250,000 of gains from taxation, while married couples filing jointly get up to $500,000. Anything above that is taxed at rates ranging from 0% to 20%, depending on income, plus a potential 3.8% net investment income tax for high earners. This system has been in place since the Taxpayer Relief Act of 1997, designed to encourage homeownership without overly penalizing sellers.

Advocates for cutting these taxes, including some conservative think tanks and real estate industry groups, contend that the current structure creates a "lock-in effect." Homeowners, they say, are reluctant to sell because they don't want to fork over a chunk of their profits to the IRS. This hesitation keeps properties off the market, contributing to the inventory shortage that's plagued the U.S. housing sector for years. For instance, in markets like California and New York, where home values have soared, sellers might face hefty tax bills on gains exceeding the exclusion limits. By eliminating or significantly reducing these taxes—perhaps through a full exemption or a lower rate—more homes could hit the market, increasing supply and, theoretically, moderating prices. This idea has been floated in various policy discussions, including as part of broader tax reform packages aimed at stimulating economic activity.

At first glance, the logic seems sound. The U.S. is facing a severe housing shortage, with estimates from organizations like the National Association of Realtors suggesting a deficit of millions of units. Low inventory has pushed median home prices to record highs, with the national average now hovering around $400,000, pricing out first-time buyers and low-to-middle-income families. In hot markets such as Austin, Texas, or Seattle, Washington, bidding wars are commonplace, and homes sell for tens of thousands above asking price. If tax cuts could unlock even a fraction of the estimated 80 million owner-occupied homes in the country, it might provide some relief.

However, experts across the spectrum argue that this tax cut would be a misguided fix, failing to tackle the underlying issues while disproportionately benefiting the wealthy. For starters, the lock-in effect is overstated. Studies from institutions like the Urban Institute and the Brookings Institution show that capital gains taxes are not a primary deterrent for most sellers. Homeowners decide to sell based on life events—job relocations, family changes, retirement—or market conditions, not tax implications. In fact, a 2022 analysis by the Tax Policy Center found that only about 10% of home sales generate taxable gains beyond the exclusion thresholds, and those are typically high-value properties owned by affluent individuals. Cutting taxes here would primarily pad the pockets of the top earners, who already enjoy significant wealth from real estate appreciation, without broadly increasing supply.

Moreover, even if more homes did come onto the market, the impact on affordability would be minimal. The housing crisis isn't just about existing inventory; it's about a chronic undersupply of new construction. Decades of restrictive zoning laws, NIMBY (Not In My Backyard) opposition, high construction costs, and regulatory hurdles have stifled building in high-demand areas. For example, in cities like San Francisco and Boston, single-family zoning dominates, preventing the development of multifamily units that could house more people affordably. A tax cut on sales wouldn't address these barriers; it might even encourage speculation, where investors buy and flip properties for quick profits, further inflating prices.

Consider the broader economic context. During the COVID-19 pandemic, low mortgage rates and remote work trends fueled a buying frenzy, but supply couldn't keep up. Now, with interest rates climbing to combat inflation, the market has cooled, yet affordability remains elusive. The Federal Reserve's rate hikes have pushed 30-year mortgage rates above 7%, making monthly payments unaffordable for many. A capital gains tax cut might prompt some baby boomers—often called "empty nesters"—to downsize, but data from AARP indicates that many prefer aging in place, supported by home equity loans or reverse mortgages, rather than selling. Tax incentives alone won't change that calculus.

Critics also point out the fiscal folly of such a policy. Reducing capital gains taxes could cost the federal government billions in revenue, according to estimates from the Joint Committee on Taxation. That lost income could otherwise fund programs that directly address housing issues, like subsidies for low-income buyers or grants for affordable housing development. In contrast, successful interventions in places like Minneapolis, which reformed zoning to allow more duplexes and triplexes, have shown real progress in increasing supply without tax giveaways.

Alternative solutions offer more promise. Experts advocate for a multifaceted approach: streamlining permitting processes to speed up construction, providing incentives for builders to create affordable units, and expanding programs like the Low-Income Housing Tax Credit. On the demand side, policies such as down payment assistance for first-time buyers or rent control in overheated markets could help. Some states, like Oregon and California, have already taken steps to override local zoning restrictions, mandating denser development near transit hubs. Internationally, models from countries like Japan, where flexible zoning has kept housing costs stable despite population density, provide lessons for the U.S.

Furthermore, addressing the housing crisis requires confronting inequality. Homeownership has long been a pathway to wealth-building, but it's increasingly out of reach for younger generations and minorities. Black and Hispanic households, for instance, face homeownership rates 20-30 percentage points below whites, partly due to historical discrimination and current barriers. A tax cut on gains would widen this gap, as it favors those who already own valuable properties, often in desirable neighborhoods.

In the end, while cutting capital gains taxes on home sales might sound like an elegant solution, it's a superficial one that ignores the structural deficiencies in America's housing market. True reform demands bold action on supply-side constraints, not tax breaks for the fortunate few. As the nation grapples with this affordability crunch, policymakers would be wise to prioritize building more homes, reforming outdated regulations, and ensuring equitable access—measures that could genuinely transform the landscape for millions of aspiring homeowners. Without them, proposals like tax cuts risk becoming just another distraction in a crisis that demands real, systemic change. (Word count: 928)

Read the Full NBC New York Article at:
[ https://www.nbcnewyork.com/news/business/money-report/why-cutting-capital-gains-tax-on-home-sales-wouldnt-solve-the-countrys-housing-issues/6345623/ ]