A boomer couple wants to sell their 5-bedroom home. But they’re delaying in hopes of avoiding at least $700,000 in taxes.

Joel and Kathryn Friedman, both 71, are counting the days until they can sell their home and move into a 55-plus community.

The retired empty-nesters have been ready to downsize for years, but are reluctant to sell their five-bedroom, 5,000-square-foot Southern California house in large part because of at least $700,000 in capital gains taxes they estimate they’d have to pay.

Since 1997, home sale profits over $500,000 (for married couples) and $250,000 (for single filers) have been subject to a capital gains tax of up to 20%. That threshold hasn’t changed since 1997, meaning that — between inflation and soaring home prices pushing an ever higher number of houses above that limit — many more home sellers have to pay the tax now than when it was first implemented.

The Friedmans are among a growing number of older homeowners discouraged by the tax from selling their valuable properties. Housing economists say that dynamic has exacerbated a shortage of family-sized homes on the market, especially in expensive places like California.

The Friedmans’ house is too big for them, and maintenance costs are only rising, Joel said. “There are a million reasons why we’d like to move, but we’re not because the tax is just burdensome,” he said.

But that could change — there’s bipartisan support in Congress for raising the federal tax threshold to boost home sales in a stagnant market. President Donald Trump recently said he’s weighing eliminating the levy altogether.

Growing desperate to move, the Friedmans finally put their house on the market in May for nearly $4.5 million. But things changed for them in July, when the issue got new attention in Washington.

Just weeks after Republican Rep. Marjorie Taylor Greene introduced a bill to eliminate the federal capital gains tax on home sales, Trump said the effort could help juice housing market sales amid persistently high interest rates.

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So the Friedmans are letting their listing expire and hoping the law changes in the next year.

“At the moment, it’s a disincentive to put my house on the market, and it’s an incentive, if you already have it on the market and you can afford to wait, to take it off the market,” Joel said.

A $700,000 tax bill

The Friedmans bought their lot and built their home in 1990. Like many California homes, the property has since appreciated significantly.

Joel calculates that he and Kathryn have spent a total of $1.8 million on purchasing their land, and building and improving their property over the last more than three decades. If the couple were to sell their house for $4.5 million, he estimated that federal and state capital gains taxes would apply to about $2 million in profit after existing exemptions. That, in addition to a net investment tax, would put their tax bill at almost $700,000, including more than $400,000 in federal capital gains tax and more than $200,000 in state capital gains taxes.

Evan Liddiard, director of federal tax policy at the National Association of Realtors and a certified public accountant, estimated the couple’s combined state and federal tax bill could exceed $800,000.

While the Friedmans have done well financially, they’re relying on the profits from their future home sale to help fund their retirement. They’re concerned that Joel’s Social Security checks and Kathryn’s pension won’t be enough to cover healthcare bills and long-term care as they age.

“That’s a sizable chunk of change for anybody,” Joel said. “We’re not going to be destitute, but it does help to have the extra cash.”

The future of the tax

Over the last several years, the effort to reform the tax on home sales has been led by a Democrat. California Rep. Jimmy Panetta first introduced a bill in 2022 that would double the tax exclusion to $500,000 for individuals and $1 million for joint-filing couples and index it to inflation.

It’s unclear whether Congress will seriously consider Greene’s bill or move forward with Panetta’s legislation, which has bipartisan support. Liddiard is skeptical that lawmakers would support eliminating the tax entirely, but he argued that Panetta’s bill “would solve most of the problem” by dramatically shrinking the number of home sellers who’d be subject to the tax.

Liddiard said eliminating the capital gains tax or raising the exclusion threshold “is not a cure-all” for housing market woes, but would have a significant positive impact on inventory and affordability.

He argued that reducing the tax burden would mean more homes would hit the market, raising supply and lowering home prices. NAR has been lobbying to reduce the capital gains tax burden on home sellers for years.

But the proposed changes to the tax would disproportionately benefit homeowners in states, like California, that have the country’s most expensive housing markets. They would also tend to help wealthier homeowners who are lucky enough to be sitting on significant home equity.

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