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The housing market is a mess. Prices are unaffordable. High mortgage rates only make matters worse.
But there’s another problem that doesn’t get as much attention: Longtime owners are hanging on to houses that are now too big for their needs, while younger families are desperate for more space.
The federal government could help break the logjam by changing the tax rules so sellers keep more of their gains.
Today’s capital-gains exclusions on sales of primary residences — $250,000 for individuals and $500,000 for couples — were set in 1997, when home prices and typical gains were lower.
After a blistering run-up in prices, many owners — particularly older ones — now face sizable tax bills when they sell. If the exclusions were raised — or the tax eliminated — downsizing would be less costly.
What kind of savings are we talking about?
It depends on the seller’s tax bracket.
But take a hypothetical person whose combined federal and state capital gains rate is 20 percent. On a profit of $750,000, that seller would owe taxes of more than $100,000 after the $250,000 exclusion. With a $500,000 exclusion, the tax bill would drop to about $50,000.
On Capitol Hill, Representative Jimmy Panetta, a California Democrat, proposed doubling the exclusions to $500,000 for individuals and $1 million for couples and indexing them to inflation. A bill filed by Representative Marjorie Taylor Greene, a Republican from Georgia, would eliminate caps on the exclusions. Neither proposal has advanced.
President Trump has also floated ending capital-gains taxes on home sales outright, though he’s put more energy into pressing the Fed to slash rates.
“This wouldn’t fix all the problems,” said Cristian deRitis, deputy chief economist at Moody’s Analytics and the coauthor of a new analysis of the exclusions. But it is a way to chip away at a logjam in the residential real estate market, he said.
Mismatched living space
Moody’s estimates more than 15 million households live in homes with at least twice the US per-person average of about 700 square feet of living space. (Census data don’t separate houses from apartments for this metric.)
“This misallocation is especially acute among empty-nest seniors living in homes much larger than they need — and often want,” the report by deRitis and chief economist Mark Zandi argues. It’s creating a logjam: Trade-up buyers can’t find listings and are stuck in homes too small for growing families.
DeRitis says eliminating the tax would cost the federal government roughly the same or less than many other housing policies. But when houses are being bought and sold, that stimulates other economic activity and generates money from transfer and property taxes — though much of that would accrue to state and local governments.
However, analysts at the Budget Lab at Yale recently argued that eliminating capital-gains taxes on primary residences would have limited reach. That’s because only about 15 percent of households have gains above the current exemption, according to the National Association of Realtors.
Plus those households skew older and wealthier. In 2022, owners with gains above the exemption had average net worth of about $5.7 million, versus just over $1 million for those below it.
Nonetheless, the current exclusion is outdated and contributes to gridlock by discouraging mobility. Eliminating the cap on taxable gains or substantially increasing the exclusion wouldn’t cure the housing shortage, but it would reduce one self-inflicted friction.
Given the president’s campaign promises to boost housing — and his long-standing aversion to taxes — it’s notable the idea hasn’t received more attention.
🧩 6 Across: Surprise win | ☀️ 78° Warm and dry
No parking: Once little more than one giant parking lot, Boston’s Seaport has exploded into a thicket of swanky lofts, hotels, and offices — and now there’s hardly a place to park.
A different vibe: Provincetown’s unique inns, which have helped define visitors’ experience for decades, are decreasing as large operations take over more of the town’s lodging rooms.
So much winning: China won the global electric car battle by flooding the world with its vehicles. Now it’s doing the same with freight trucks: Last year it sold 80 percent of the world’s 90,000 electric cargo-trucks. (Rest of World)
Deportation dispute: Ten years after Palestinian activist Mohsen Mahdawi walked into a rural gun shop in Vermont, his encounter with the gunsmith inside has become a contested episode in a national immigration fight.
Stormy weather: While Hurricane Humberto churns away in the western Atlantic, a tropical depression has strengthened into Tropical Storm Imelda, threatening the Bahamas and potentially parts of the southeastern US. (NBC News)
A grim future: Medicaid cuts, changes in immigration rules, and tweaks to a key prescription drug program are imperiling vital community health centers across Massachusetts.
Adams ends it: In many ways, the decision by NYC Mayor Eric Adams — quotable, luxury-loving, perpetually mysterious — to end his flailing re-election campaign was the most conventional thing he had done in some time. (NY Times 🎁)
Will there be a shutdown? Congress is staring down another government shutdown, but there’s more uncertainty about this one, because of the politics as well as personnel and policies of the Trump administration.
Bad Bunny, good show: The NFL announced that singer Bad Bunny will be the halftime performer at Super Bowl LX after Taylor Swift reportedly declined. (Yahoo Sports)
Remembrance: Peter Southwick, a former director of photography for the Globe and Boston University professor who covered dozens of major stories while a photographer for the Associated Press, died earlier this month, three years after being diagnosed with cancer. He was 74.
By Teresa Hanafin
🗓️ Free events this week: A couple of fall festivals, an ode to herring at the Mystic River, Free First Thursdays at the Gardner Museum, and more things to do.
🀄️ Mahjong is hot. And teaching it is even hotter. As the centuries-old Chinese game finds new fans, instructors are in high demand, with some turning lessons into thriving businesses. (Axios)
🏈 Career redux: The football comedy “Chad Powers,” premiering Tuesday on Hulu, stars Glen Powell as a former college QB whose dream of a pro career is dashed, but who dons a disguise to play college ball again.
👄 ‘Change’: Taylor Swift has come a long way since launching her music career as a country singer. Turns out her dialects have evolved, too, and are the subject of study by speech scientists. (CNN)
🏠 Home of the Week: History and charm in Salem — a circa 1870 house that has 3 bedrooms, 3 full baths, and 5,000 square feet of character.
🎧 Soundtrack of your life: Have a yearning for throwback tunes? Visit The Nostaglia Machine, pick a year, and revel in your youth. (Nostaglia Machine)
🍦 Good gut: Maria Branyas Morera of Spain lived to be the world’s oldest person. A new study credits genetic variants — and maybe her yogurt habit. (CBS News)
Thanks for reading Starting Point.
This newsletter was edited by Teresa Hanafin.
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