Reducing Personal Taxable Income and Increasing Tax Revenue – An Innovative Idea
By Robert Klein, CPA
In the past 24 years, you have been able to sell your principal residence and exclude a gain of up to $250,000 if you are using single filing status and up to $500,000 if you are married and filing jointly. The home sale exclusion rule applies if the property has been owned and used as a principal residence for two or more years during the five-year period ending on the date of the sale. Exclusion is usually only allowed once every two years.
Although the home sale exclusion was a welcome change when it came into effect in 1998, it failed to keep pace with house price inflation. According to the US Bureau of Labor Statistics, the housing inflation rate from 1998 to March 2022 averaged 2.53% per year. House prices are 81.94% higher in March 2022 than in 1998. Applying this to the exclusion of home sales, the inflation-adjusted house price amounts are projected to be $455,000 and $910,000, respectively.
Epic housing shortage
Inflation began to deteriorate noticeably as annual rates rose from 2.6% in March 2021 to 4.2% in April, with steady increases to reach a new four-decade high of 8.5% in March 2022. House prices skyrocketed by 18.5% in December 2021 nationally. , compared to December 2020. This has resulted in an epic housing shortage and associated buying frenzy with no end in sight in the near term.
We know that rising mortgage rates and rising housing stock, along with the fact that house price growth cannot outpace income growth indefinitely, will end the buying frenzy. High property taxes, higher mortgage rates and other rising costs of ownership will make continued affordability more difficult for recent buyers.
A reduced housing inventory without some form of stimulus is more problematic given the origin of the current housing shortage. The forces driving the housing market frenzy according to Mynd Report article from January 26, 2022 by Tom Brady include “a flight from urban centers by pandemic-weary apartment dwellers in search of more space, a construction industry that has been underbuilt for the past decade, and developers facing lumber prices that have skyrocketed over the past year; and increases in the cost of materials such as steel, drywall and other building materials.
Double exclusion from the sale of homes to increase the inventory of existing homes
The preceding factors created a perfect storm for Congress to enact legislation to double the home sale exclusion amounts from $250,000 (single) and $500,000 (married filing joint) to $500,000 and 1 million dollars, respectively. Ignoring the dramatic rise in inflation over the past 13 months which is not expected to subside anytime soon, as previously reported, the house sale exclusion should be $455,000 and $910,000, respectively. , if simply adjusted for housing inflation over the past 24 years. .
A doubling of the home sale exclusion would increase the inventory of existing homes, as it would motivate owners of highly valued homes who want to sell but have been reluctant to do so due to the low home sale exclusion amount. . This includes older owners with substantial unrealized capital appreciation. Many of these people are reluctant to sell their home as their heirs will be able to do so with much less or no income tax using the base increase rules at death.
Doubling the home sale exclusion would boost tax revenue
As well as reducing the existing housing shortage, a doubling of the home sale exclusion would boost sales of highly valued properties. The unrealized gains on many of these properties significantly exceed the proposed increased home exclusion amount. This would result in a considerable increase in federal and state tax revenues.
An obvious question is what about the potential loss of tax revenue due to increased home sale exclusion amounts? Given the amount of wealth associated with unrealized real estate gains, I believe the total incremental income tax revenue attributable to taxable capital gains from the sale of principal residences that would not otherwise occur will exceed far from the reduction in income attributable to the increase in exclusion.
Make the legislation retroactive to the date of the proposal
It is the responsibility of Congress to make legislation retroactive to its date of proposal given the time that elapses between proposal and enactment of this type of legislation. It would jump-start the alleviation of the housing shortage, raise tax revenue sooner, stimulate the overall economy and present a public relations opportunity for a Congress that has been very beleaguered and divided in recent years. This would be especially welcome given the administration’s proposal to double the long-term capital gains tax rate from 20% to 39.6% for households with incomes over $1 million a year ago. year.
Doubling the home exclusion amount from $250,000 for single filers and $500,000 for joint filers to $500,000 and $1 million, respectively, is a win-win situation. This would increase tax revenue while reducing the current housing shortage and hastening the elimination of the current buying frenzy. This, in turn, would stabilize housing prices, reduce inflation and make residential properties more affordable. Finally, it would make homeowners less reliant on home equity lines of credit and reverse mortgages as home equity would be freed up.
About the Author: Robert Klein
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. The firm’s motto is Plan, manage and protect your retirement income™. Bob is the creator of FINANCIALLY InKLEIN’d™, a YouTube channel showcasing innovative tax-informed strategies to maximize retirement income. Bob is also the author and editor of Retirement Income Visions™a blog featuring innovative strategies for creating and optimizing retirement income that Bob started in 2009.
Bob applies his unique background, experience, expertise and specialization in tax-sensitive retirement income planning strategies, including fixed income annuities, Roth IRA conversions, HECM reverse mortgages and residual trusts charities, to optimize the projected longevity of its clients. income tax and pension assets. Bob does this as an independent financial advisor using personalized holistic planning solutions determined by each client’s financial needs.