Low pandemic-era interest rates have been blamed for contributing to higher home prices as owners feel locked in to their low mortgage rate.
But longtime homeowners facing a large federal tax bill also may play a role in staying put, including in South Florida, where homeowners built up equity faster than the national pace.
As home prices recovered after the Great Recession and then rocketed higher during the COVID-19 pandemic, long-term regional homeowners have seen the value of their home equity balloon at almost twice the national average. It means these homeowners have significant unrealized profits, which may lead to a big tax bill when they decide to sell.
Potential taxes on housing profits could be a contributing factor to keeping many older homeowners locked in bigger homes and keeping younger buyers locked out of the housing market, according to a new analysis by financial services firm Moody's.
”This is just one piece in a puzzle,” said Cris de Rituis, deputy chief economist at Moody’s. “ The federal government doesn't have a whole lot of control of the housing market. This is one area though, that it does have some control,” he said.
Homeowners pay federal taxes on gains over a certain amount. Single owners exclude the first $250,000 of gains. Married couples can skip the first $500,000. Owners can take off any big improvements from their gains. Any profit above those amounts is taxed up to 20%, depending on the owner’s income.
A lot of South Florida homeowners likely face a similar tax bill if they sell their home. The median owner has owned their home for more than a decade in the region. That puts the area in the top 15 metropolitan areas in the country with the longest homeownership tenure. The years have been profitable to own a home or condo.
“Homeownership has created significant wealth for Southeast Florida homeowners over the past 15 years since the Great Recession,” wrote the Miami Association of Realtors in its quarterly report on housing wealth. It found Miami-Dade County single family homeowners have accumulated more than $500,000 of equity in their homes in the past 15 years. Owners in Broward Palm Beach counties have almost that much.
Home prices have risen faster here than the national average, leading to this profit potential for home sellers.
Long-term condo owners also have built up equity — more than $350,000 for the typical condo in Miami-Dade and more than $250,000 in Broward and Palm Beach counties, according to the association’s data.
Should these long-term owners decide to sell, they could trigger a significant federal tax bill.
READ MORE: Condo prices are still sliding as hopes rise that lower mortgage rates will help
Today’s federal capital gains tax structure for home sales was set in 1997. The exclusions haven’t changed as the U.S. housing market has taken off thanks to population growth, periods of historically low interest rates and a slowdown in building new homes.
De Ritis estimated that if the home profit tax exclusion kept pace with inflation, the limit would double – $500,000 for single tax filers, $1 million for married couples. If the 1997 ceiling had been tied to home prices, the tax-free profits from a home sale would be even higher.
“ It's certainly a pretty significant consideration,” he said. “Our thought was perhaps this capital gains tax might be a deterrent to some of the (home) selling that otherwise could occur.”
A typical Miami-Dade County homeowner who bought their home 15 years ago and sold it today could face a tax bill between $13,000 to $63,000 depending upon their tax filing status.
“You do have homeowners who may be sitting in their properties. In the back of their minds, they really would like to sell. They would like to downsize,” de Ritis said. “They're locking up that property. It is then leading to a situation where there is perhaps less housing available for new buyers or people who need more space.”
