Tax Policies Encourage Boomers to Hold Homes, Impacting Market

A growing number of older homeowners are refraining from selling their properties due to concerns over capital gains taxes, prompting many to consider holding onto their homes longer. This trend, particularly among baby boomers, has significant implications for both the housing market and the financial future of their children, who may stand to inherit these homes tax-free.

Duane Flemming, an 81-year-old retired veterinarian, and his wife, Chris Currie, have lived in their four-bedroom home in a suburb 30 miles east of San Francisco for over four decades. Although they wish to downsize, the potential tax burden from selling their home has deterred them. “We don’t use three-quarters of the rooms we’ve got,” Flemming noted, expressing his desire for a simpler living arrangement without incurring “huge expenses.”

Since the introduction of the capital gains tax in 1997, homeowners have faced taxes on profits exceeding $250,000 for single filers and $500,000 for married couples. The tax can reach as high as 20%, not including possible state taxes. Flemming believes the appreciation of his home has added approximately $800,000 in value, which could result in a capital gains tax of between $30,000 and $60,000 upon sale. This financial burden raises concerns about whether the remaining funds would be sufficient for purchasing a new home or covering healthcare costs.

The impact of the capital gains tax has been pronounced. According to a 2025 report by the National Association of Realtors, approximately 34% of U.S. homeowners could surpass the $250,000 threshold if they sold their homes. This is a marked increase from just 1.3% in 2003. The property data firm CoreLogic also highlighted that the taxation landscape has changed significantly, pushing more homeowners to remain in their properties.

If Flemming and Currie retain ownership of their home until their passing, their children will inherit it with what is known as a stepped-up tax basis. This means they would only owe capital gains taxes on the appreciation occurring after the inheritance, effectively eliminating the tax impact from their parents’ ownership period. Federal estate taxes would come into play only if the total inherited assets exceed $28 million, a threshold far above the typical value of a family home.

The capital gains tax has contributed to a phenomenon known as the “lock-in effect,” where older homeowners are discouraged from downsizing, exacerbating housing shortages for younger families. Jim Parrott, a nonresident fellow at the Urban Institute, pointed out that empty-nester boomers own twice as many homes with three or more bedrooms compared to millennial families. This discrepancy has created a “giant mismatch” in housing availability, leading to broader market implications.

There is a growing dialogue in Washington regarding the potential reform of capital gains tax policies. Some, including Rep. Jimmy Panetta, have proposed legislation to double tax exclusions to $500,000 for individuals and $1 million for couples while indexing these amounts to inflation. This idea garners bipartisan interest, including support from former President Donald Trump, who has suggested eliminating the tax altogether.

Critics argue that any tax relief could disproportionately benefit wealthier individuals and may not significantly alter housing affordability. Daniel Hemel, a tax law professor at New York University, expressed skepticism about the effectiveness of tax reforms in easing market pressure, stating, “You get a delay in the time of sale, but people don’t live forever.”

For some retirees like Patrick G., the decision of whether to sell is complicated by the tax implications. After losing his wife in 2023, he is considering renting his home to allow his children to inherit it under the stepped-up basis rule. “I would probably turn it over to a property manager and let it become either an income stream or an appreciating asset for my kids when I pass,” he explained.

Similarly, Collin Goodall, an artist from Rumson, New Jersey, faces a choice about selling his home, which has appreciated significantly since he purchased it three decades ago. He expressed a desire not to let tax considerations dictate his decisions about downsizing. “I would not like to make a decision about downsizing, driven by, am I going to save a bunch in taxes,” he remarked.

While discussions about reforming the capital gains tax are ongoing, experts agree that addressing the housing supply issue requires a multifaceted approach. Parrott acknowledged that while tax reform could help, it is just one part of a larger solution needed to tackle the complexities of the housing market.