Could a New Housing Bill Help Homeowners Keep More of Their Equity?

For many homeowners, their house isn't just where they live, it's also their largest financial asset. If you've owned your home for an extended period of time, there's a good chance that appreciation has pushed you closer to (or beyond) the federal capital gains tax exclusion limits.

Now, a new bipartisan proposal gaining momentum in Washington could change that.

The recently passed 21st Century ROAD to Housing Act has renewed conversations in Congress about additional housing reforms, and one of the biggest topics on the table is modernizing the capital gains tax exclusion for homeowners. Industry groups, including the National Association of REALTORS®, are pushing lawmakers to update a tax rule that hasn't changed since 1997. (Investopedia)

The Problem With Today's Capital Gains Rules

Current federal law allows homeowners to exclude up to:

• $250,000 in capital gains for single filers

• $500,000 in capital gains for married couples filing jointly

...when selling a primary residence, provided they meet the ownership and occupancy requirements.

The problem? Those limits were established nearly 30 years ago.

Since then, home values have risen dramatically across the country, including throughout Houston and many surrounding communities. While home prices have climbed substantially, the tax exclusion has remained exactly the same. (Realtor)

Why This Matters

Many longtime homeowners have built hundreds of thousands of dollars in equity.

For some, especially those who purchased their homes in the 1980s or 1990s, selling today could mean exceeding the current exclusion limits and facing a significant capital gains tax bill.

That tax burden can create what's known as a "lock-in effect."

Instead of moving to a smaller home, relocating closer to family, or downsizing after retirement, many homeowners simply stay put because selling could trigger a large tax bill.

According to research highlighted by the National Association of REALTORS®, an estimated 13 million homeowners may already be affected by these outdated limits. (Realtor)

The Proposed Change

Several proposals are being discussed in Congress, but one of the most widely supported would:

• Increase the capital gains exclusion to $500,000 for individuals

• Increase it to $1 million for married couples

• Index those amounts to inflation so they continue to keep pace with home values in the future. (San Francisco Chronicle)

If enacted, many homeowners would be able to sell their primary residence while keeping substantially more of the equity they've spent years building.

What This Could Mean for the Housing Market

Updating the capital gains exclusion wouldn't just benefit sellers, it could also help buyers.

If more homeowners feel financially comfortable selling, it could:

• Increase the number of homes available for sale

• Give buyers more choices

• Help older homeowners downsize without a major tax penalty

• Improve housing mobility overall

Housing experts believe reducing this tax barrier could gradually help address the inventory shortage that has affected many markets over the past several years. (NAR)

Impact On the Greater Houston Area Real Estate Market

Here in the Greater Houston area, many homeowners purchased their homes years ago—well before today's home values.

Communities throughout Cypress, Bridgeland, Towne Lake, Katy, Spring, The Woodlands, and other established neighborhoods have experienced significant appreciation over time.

While not every homeowner will exceed the current exclusion limits, those who have owned their home for many years may be surprised by how much equity they've accumulated.

A higher exclusion could allow many families to:

• Keep more of the proceeds from their sale

• Better afford their next home

• Fund retirement

• Help children or grandchildren

• Invest those dollars elsewhere instead of paying additional taxes

Is This Law Yet?

Not yet.

While the housing bill has sparked renewed momentum around tax reform, proposals to increase the capital gains exclusion still must move through Congress before becoming law. Several bipartisan bills addressing the issue have already been introduced, and the conversation is gaining support as lawmakers look for ways to improve housing mobility and increase available inventory. (San Francisco Chronicle)

Thinking About Selling?

If you've owned your home for many years, now is an excellent time to understand both your home's current market value and the potential tax implications of selling.

Every homeowner's situation is unique, and tax laws can be complex. Before making any decisions, it's always wise to consult with a qualified tax professional or CPA.

If you're curious about how much equity you've built or want to explore your options, I'd be happy to provide a complimentary home value analysis and discuss today's Houston market. Whether you're planning to sell this year or simply preparing for the future, understanding your options is the first step toward making the best financial decision.