Capital Gains Taxes Strapping Baby Boomers To Their Large Homes; It's Also Impacting Millennials

Baby boomers whose kids don't live with them anymore are strapped to their large homes due to the capital gains tax structure in the US, a new Redfin analysis has revealed. Boomers holding on to real estate is also making it harder for millennials with families to buy a bigger home for their growing families.

As per the report, there's no city in the country where millennial families own a larger share of big homes than boomers. This adds to the massive disadvantage that millennials have in the housing market amid soaring prices, high mortgage rates, and a shortage of homes.

What are Capital Gains Taxes?

Capital gains tax applies to any profit made from buying an asset at a price and then selling it at a higher price later. Thus, the profits made in the transaction are subject to taxes like any other profits. However, some caveats can save people money, but there is a catch.

Why Are Baby Boomers Not Selling Their Homes?

Most of the baby boomers bought their large homes decades ago at much affordable rates and some even traded up for bigger houses later on. Further, several of these owners do not have mortgages, thus their average housing cost is as low as $612, giving them a good reason to stay put.

Role of Capital Gains Tax

Federal and possibly state capital gains taxes can be significant for such long-time homeowners. There is a provision of an exemption worth $250,000 on capital gains tax each for a couple jointly filing for taxes after selling their primary home. However, it is not incentive enough to sell.

For instance, boomers who bought a property for $100,000, 37 years ago in California, can sell their property for up to $2 million, per a CNN report. Thus, only $500,000 from the $1.9 million profit will be exempt from taxes. The rest will be taxable at a 20% rate, meaning they will pay about $280,000 in taxes. Thus, aging seniors who have raised their kids to live independently may now be trapped in what was once their dream.

What Are The Consequences?

As per a Business Insider report, the straight consequence of high capital gains tax is felt by millennials with kids. They are being locked out of the large homes they want or need and most of them are forced to move to suburbs or far-flunging areas to find ideal homes. This represents a massive misallocation of the housing supply.

As for seniors, staying in a large home while aging is also not an ideal experience. These people need homes that are more accessible and easier to maintain and the large homes are often the opposite of that. Multiple floors, large yards, and several rooms, are harder for older people to navigate.

Further, the neighborhoods that tend to have large homes are often not walkable or accessible by public transit, making it even worse for seniors who may face social isolation as they are not fit to travel or drive less, Jenny Schuetz, a housing policy expert at the Brookings Institution noted in the Insider report.