The hidden tax that could threaten Americas fast-growing real estate boomtowns
When Realtor.com first exposed the hidden home equity — a year ago, it looked like a penalty on patience.The risk was most acute in places where decades of appreciation had pushed long-tenured homeowners past the capital gains exclusion for primary home sales — potentially exposing them to federal tax rates as high as 20%.Now, new research from the National Association of Realtors (NAR) suggests the home equity tax may also become a penalty on timing.In fast-growing markets, homeowners who bought before a recent price boom are coming very close to the exclusion limit.“What we are seeing is two dynamics happening at the same time,” explains Nadia Evangelou, senior economist and director of real estate research at NAR.
“You have the high-cost markets where exposure is already very high, often affecting the majority of homeowners, and then you have the growth markets where exposure is rising quickly as prices increase.”NAR estimates that 13.1 million homeowner households, or roughly 15% of all owner-occupied households, already have unrealized gains above the capital gains exclusion available to them.It’s a more conservative figure than previous research, which estimated possible exposure at 29 million households.But the new analysis applies filing-status thresholds, offering a more precise picture of who is already exposed and where the risk is spreading next.About 63% of homeowner households in San Jose, CA, have unrealized gains above their applicable exclusion threshold, according to the analysis from NAR.
In Urban Honolulu, the share is 54.4%, and in San Diego, it is about 54%.These are the high-exposure, high-cost markets Evangelou described.In these areas, exposure is largely the result of time: Owners bought decades ago, when local prices were still within reach for middle-income households.
Then, ordinary appreciation did what ordinary appreciation is supposed to do — build wealth — until it pushed them past the exclusion limit...