Could Capital Gains Tax Reform Reduce Housing Supply?

Posted on December 06, 2017 by Laura Lam

taxesWhile tax reform will impact everyone who works in mortgage finance to some degree, it may also affect potential homeowners and home sellers via reform to the capital gains tax.  Capital gains is a tax that may be levied when an investor sells an asset at a notable profit — selling a home may be an example of this type of taxable transaction.

Data and analytics firm Black Knight did a deep dig into the tax reform.  One clear finding from Black Knight is that proposed changes to the capital gains exemption on profits from the sale of a home (requiring 5 years of continuous residence as compared to the current 2 years) could impact approximately 750,000 home sellers per year, also potentially increasing pressure on available inventory, the company said.

According to their SiteX property record database analysis, Black Knight found that on average, over the past 24 months, more than 14% of property sales were by homeowners falling into that 2-to-5-year window and who would no longer be exempt from capital gains taxation. On average, $60 billion in capital gains each year could be impacted, with a worst-case scenario (taxing the full amount under the highest tax bracket) putting the cost to home sellers at approximately $23 billion. If such homeowners choose to forego or delay selling to avoid a tax liability, this may also further reduce the supply of homes for sale.

In a market already plagued with a housing supply crunch, the Black Knight finding does not provide a silver lining.

Source:  Housing Wire