Boomers are not moving out of their big homes

Boomers are not moving out of their big homes, per CNN.


Many Baby Boomers who have seen a significant increase in the value of their homes are now faced with sizable capital gains tax bills when they sell. This tax applies to the profit made from selling an asset, such as a home, that has appreciated in value.

Moreover, finding smaller homes or apartments in the neighborhoods they love is challenging. With current high prices and mortgage rates, the cost difference between their current home and a smaller one is often minimal.

For long-time homeowners whose property values have soared over several decades, federal and possibly state capital gains taxes can be substantial.

Fortunately, most homeowners can exclude capital gains on their home when they sell. The tax legislation from the 1990s allows a single tax filer to exclude up to $250,000 of gain, and a couple filing jointly can exclude up to $500,000, provided the sale is of their primary residence and they meet other requirements, such as living in the property for two of the past five years.

However, for homeowners who have seen enormous growth in home values over many years, such as in parts of California, the exclusion may not cover the full gain. For example, if a couple bought a home for $100,000 in 1987 and now sells it for $2 million, only $500,000 of the gain would be excluded from taxes.

The remaining taxable gain of $1.4 million, taxed at 20%, would result in a $280,000 tax bill. In California, with additional state tax, the total payment could exceed $450,000.

Many neighborhoods where older homeowners reside are zoned for single-family homes and have limited smaller homes or multi-family properties like condos or rental buildings.

This scarcity of housing options is often referred to as the "missing middle" in housing.

While efforts to address this issue, such as allowing the construction of smaller apartment buildings and accessory dwelling units like granny flats, are underway, these changes will not happen overnight. However, some Boomers may find relief by downsizing to a smaller home if they can build an accessory dwelling unit on their adult child's property.