Zillow predicts the new capital gains tax rule could have a “substantial,” impact on the US housing market, with the ability to “radically change,” when owners list homes for sale, and how much they’ll pay in taxes.
Earlier this year we pointed out the proposed change to capital gains taxes on selling a home. This seemingly small edit to real estate tax rules was quietly inserted into the new tax plan, and has largely gone unnoticed (at least compared to the limitation of the property tax and mortgage interest deductions).
As of January 1st, 2018, the new tax bill would strip away current protections that exempt home sellers from capital gains taxes on up to $500,000 in gains, providing they’ve lived in their home for 2 of the last 5 years. They will now need to live in a residence for 5 of the last 8 years in order to receive the same protections.
This could be seriously disruptive for individuals, families, and even investors who have been eagerly waiting for that 2 year mark to arrive. Zillow projects that this new rule could mean as much as $75,000 in additional taxes on the sale of a home for those who have only owned for 4 years.
This could produce a big surge in new house listings before the end of 2017, as owners race to beat the rule and the big losses through tax liabilities when selling. This could make the landscape rich with investment opportunities and deals between now and the new year. Yet, since not much noise has been made about this tax rule change, many will miss the deadline. That could then lead to more owners choosing to stay put for much longer periods of time, and artificially alter the typical moving timeframe. That may lead to more tightness in the housing market, rising property prices, and some negative side effects for related businesses like moving companies.
Plays on short and long term capital gains could be a thing of the past not only for the typical homeowner, but also for the house hacker. Many real estate investors took advantage of 2 of 5 year ownership tax break – using their own home as an investment vehicle by buying a fixer, living in it at least two years then flipping the tax free profits into a new home – and doing that repeatedly until their primary residence is owned free and clear from tax free home sale profits. With the changes in the cap gains exclusion, the time frame is extended to 5 years effectively putting the breaks on a house hacking tax strategy.