What’s the upside of eliminating home sale capital gains tax?

Today I asked AI: What happened to the proposal to eliminate home sale capital gains tax?

The answers were unanimous: Gridlock. No movement.

The proposed laws range from raising the exemption to $500,000 for solo homeowners to completely eliminating the tax for sales of primary residences.

Everyone talks about the need to build more housing. Could incentives for aging homeowners to sell and move out of inaccessible, over-sized homes solve the crisis?

Historically, Section 121 of the IRS allows each homeowner to deduct $250,000.

This rule has led to ponderings about how to increase deductions.

• Should my sibling become an owner (joint tenant) so we can each get a $250K deduction upon selling?
• Should I get married to a fellow tax-optimizer, for a total $500,000 deduction?

The National Association of Homebuilders estimates 1-2% of homes in the United States are valued above $2 million. That makes around 138 million valued under $2 million.

This is all just my opinion and my prognostication…and I’m not an accountant, law maker, lawyer, or even an economist.

Still, here are just a few things that could happen if the capital gains tax exemptions on home sales is increased or eliminated for certain price ranges of homes (say, for those under $2 million):

1. AMERICANS HOMEONWERS WILL NO LONGER FEEL “STUCK:” One of the most memborable books I’ve read is “Stuck: How the Privileged and the Propertied Broke the Engine of American Opportunity” by Yoni Appelbaum, about how much harder it is for Americans to move around for opportunity and change than it was a century ago. Yes, the book is not about the wealthy feeling stuck. But there are plenty cash-poor homeowners who want to sell. They don’t want to sell if they can’t net any money after the sale, due to taxes.
   
2. MORE LARGE HOMES HOUSING INVENTORY: The most common reason real estate agents hear from seniors about why they don’t want to sell: The taxes! “I would net almost nothing.” “I can’t afford to sell because of the taxes.” Home sale tax reform would lead seniors with large homes would rush to downsize and sell.
   
   Hilly places such as the Berkeley Hills, Oakland Hills, San Francisco and towns across California along hillsides would see an influx of sellers.
   
3. LOWER HOME PRICES: Because of the higher inventory (supply), buyers will have more choice which could depress prices. Then again, some of the most fabulous homes have epic views, which might see a surge beyond the one Bay Area home sellers are currently enjoying. Some home owners who have purchased recently or done major home renovations in recent years might hesitate to sell at these lower prices.
   
4. DECREASE IN RENTAL PRICES: With lower real estate prices, renters would find it more possible and sensible to buy instead of continuing to rent.
   
5. COMPETITION FOR HOUSES / CONDOS IN THE FLATS. Even now, North Berkeley and Rockridge sees cash-flush seniors competing with younger buyers. What used to be “starter” homes are now often ideal downsizer homes. Would this get even worse if seniors could sell their homes without paying capital gains taxes? Maybe!
   
6. BOON FOR 55+ / SENIOR LIVING COMMUNITIES with more cash-flush seniors able to relocate. It’s not that seniors all want to age in place or feel safe doing so. Even in areas with ample senior housing, that prospect of sharing much of a home’s appreciation with Uncle Sam (or other unrelated uncles) keeps many from selling. Being able to net more from selling a home would make moving to a nearby, smaller 55+ community much more of a no-brainer.
   
7. DOWNSIZING CONSULTANTS, ESTATE SALE & STORAGE COMPANIES WIN as long-time homeowners face the need to let go and embark on “Swedish Death Cleaning.” Ask me for connections to experts who can help!)
   
8. THRIFTERS HAVE A HEY DAY! Seniors especially here in Rockridge and Berkeley in our box-checking neighborhoods, will release their death-grip on their homes. Decades of interesting collections will funnel into the White Elephant Sale and other resale markets.
   
9. FEWER EMERGENCY ROOM VISITS: I don’t think it’s a stretch to say that many home owners stay where they are because they adore their homes AND because of the taxes. Could they rent their houses out? Maybe but it is a risk with Bay Area’s tenant-friendly laws.
   
10. HOME RENOVATION CONTRACTORS, STAGERS & REALTORS WIN: With all of these folks wanting to sell, because it is so important to prep a house and make updates, that means more business for electricians, painters, stagers, contractors, landscapers. Luckily there are ways to pay for the updates out of escrow.
    
11. LOCAL GOVERNMENTS WIN IN TRANSFER TAXES: 1% here, 1/2% there. Every time a property changes hands, the local government wins with transfer taxes.
    
12. ASSESSORS WIN WITH HIGHER PROPERTY TAX once the new owners take possession, assuming most properties will be re-assessed at higher values than previously. See what the Alameda County Assessor says.

Yes, the government will need to find ways to scrimp on spending or find other sources of revenue. But am I right? Am I offbase? If you’re in the East Bay and want to get together to ponder this, I’d love to.