Capital gains tax cut may not have big impact on housing market


HOMEOWNERS appear to be in for a break. While lawmakers continue to debate college tuition, per-child credits and increased Medicare payments as part of tax relief proposals, all sides agree that the vast majority of Americans should be able to sell their homes without regard to taxes. Although not final, the House, Senate and president all favor allowing married homeowners who are filing jointly to exclude from taxes up to $500,000 of a gain on the sale of their home. For single homeowners, the amount is $250,000.

Under current law, homeowners can defer taxes on the sale of a home only by buying one of equal or greater cost; those who buy down face a capital gains tax. The only break is for homeowners 55 and older, who can claim a one-time exclusion of up to $125,000 of the gain on a home sale.

Will the new limits have a major effect on the housing market? Will a significant number of homeowners who have been counting the years until they are 55 now put their houses up for sale? Will prices be affected if people can buy cheaper homes without worrying about taxes?

Michael Funk

Research Economist, Regional Economic Studies Institute at Towson University

I think it'll be good for homeowners, and the longer you've had your home, the better off you'll be. Home sales haven't appreciated much in the last 10 years. What happened in the '70s and '80s -- the rapid appreciation in home values -- was a once-in-a-lifetime thing. It was spurred by the trend toward dual-earning households, but that trend has entirely played itself out now.

In terms of the effect on the housing market, I think it will not be great. There's the potential that there will be a negative effect on the market, because when a person sells their home, there will be no need to reinvest their money into another home of greater value because of capital gains taxes. They'll be able to rent; they'll be able to buy a smaller home. That's especially the case for people with children who have gone off to school.

Still, I believe that the impact on the real estate market will be almost negligible because there are many more important factors that go into purchasing a home.

I think it's really going to come down to a lifestyle issue, not an economic issue. People on the borderline about selling their home may be enticed into doing it with the new legislation, but that won't have a tremendous effect on the real estate market.

Frederick H. Taylor

Analyst, Saloman Brothers, New York

I think that it may accelerate people to sell existing homes. When you sell an existing home, where do you go? You can buy an existing home or build a new home. If you're moving into an existing home, the number of houses on the market hasn't changed. But if you've created a new home, that means you've increased demand for new homes.

The homebuilders have been very good about building new products for the empty-nester. So my view is, it might accelerate demand for the active adult retirement segment of the new housing market.

Linda Goold

Tax counsel, National Association of Realtors, Chicago

I have been covering tax legislation for 20 years, and in all these years, this is one of the most pro-taxpayer, genuine simplifications that I have ever seen.

It's intended to help homeowners; it's not intended to have an effect on the housing market. According to our estimates, it should have no more than a 2 to 3 percent change on the price of houses. If anything, it should increase the number of transactions. But you're not doing anything that changes the economic value of the house. It simply gives homeowners more options.

The worst thing we could see happen is there being a glut of houses going up for sale, but that will correct itself over the next six to eight months.

Jack M. Queen

Executive Vice President, Long & Foster Inc.

If it does get passed, I think it'll have a good effect on everyone. First of all, only 100,000 people file gains on houses. That's awfully low considering there are 4 million homes sold each year.

From the federal government's perspective, I don't think they were collecting much money anyway. So I think they've come to grips with reality and are showing flexibility in areas important to all of us. Again, this is all on the condition that it passes, and I'm pleasantly surprised it's gotten this far.

But you have to realize that it's not any big panacea -- people buy houses not just as investments, but for their lifestyle. No matter what the government does, you're still going to have to look at the size of the family, where the schools are, where the children are.

Not only that, but even in the Baltimore/Washington area, appreciation hasn't been that great.

I would be surprised if it has a significant impact on the real estate industry.

It might increase sales by 5 percent, if that.

Pub Date: 7/27/97

Copyright © 2021, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad