The tax that’s stopping older homeowners from selling their valuable properties

Photo collage of an older couple with money and line charts
shapecharge/Getty, Anna Kim/Getty, Tyler Le/BI
  • An extra tax on home sale profits over $250,000 was designed to target wealthy homeowners.

  • But as home values have soared, the tax is impacting middle-income people, too.

  • Two older homeowners said they wanted to downsize but had been discouraged by the tax.

Many older homeowners have benefited from soaring home prices in recent years, but as they look to cash in and downsize, some are discouraged by a federal tax that applies to a growing number of home sales.

Since 1997, home sellers have had to pay federal capital-gains taxes on profits above $250,000 for a single person and $500,000 for a couple. The policy was designed to target the most affluent. But because the tax isn’t indexed for inflation and home values have climbed so much, it’s begun to impact middle-income people too.

Some older Americans who have retired or are near retirement told Business Insider that the tax had deterred them from downsizing and that they feared it would eat into crucial savings. The tax may be discouraging empty nesters from selling their larger homes to growing families, worsening a shortage of starter homes.

The share of home sales subject to the tax has more than doubled in the past few years. In 2023, 8% of US sellers made more than $500,000 in profit on the sale of their homes, the property data firm CoreLogic found. That’s up from 1.3% in 2003 and 3% in 2019. If the threshold had been adjusted for inflation, the $250,000 cutoff for individual home sellers in 1997 dollars would be about twice as high — $496,000 — in 2024 dollars.

“What we know, anecdotally, is that people are feeling locked in,” Selma Hepp, the chief economist at CoreLogic, told BI. “There are a good share of people for whom this is the only source of wealth savings.”

David Levin, 71, has lived in Manhattan Beach, California, since 1978. Now retired, Levin and his wife want to sell their four-bedroom house and buy a smaller home in their neighborhood that they can grow old in.

Their housing investments have paid off — the couple paid $632,000 for their home in 1991, and it’s now worth an estimated $2.8 million, according to a local real-estate agent Levin consulted. While they’ve benefited from their soaring home equity, selling at that price or higher would come with an extra-large tax bill.

Levin estimates that he and his wife will have to pay several hundred thousand dollars in capital-gains taxes when they sell their home. Because the couple is relying on cash from their home sale to support them through retirement, Levin doesn’t think they can afford to stay in Manhattan Beach — or live anywhere close by.