New legislation, the American Dream Act, would allow individuals 65 years or older to sell a home to a first-time homebuyer for $500,000 or less without paying capital gains taxes.
The bill is aimed at "increasing inventory and ensuring our younger generations have a fair opportunity to achieve homeownership," Rep. John McGuire, R-Va., said in introducing the bill on Jan. 16. "Today's housing market makes it increasingly difficult for first-time buyers to find an affordable home, leaving many with little choice but to become a life-long renter."
The tax break would take effect for five years beginning in 2027.
Under current law, individuals can already exclude from tax up to $250,000 in capital gains from the sale of a primary residence; joint-filing married couples can exclude up to $500,000.
But no such exclusion exists for vacation homes or rentals.
"After all, they are investments," Jeff Bush of The Washington Update told ThinkAdvisor in an email.
From a planning standpoint, the American Dream Act "could significantly reduce the 'lock-in' effect for older clients with highly appreciated secondary or rental properties, enabling them to reposition assets, downsize, or improve retirement liquidity without incurring capital gains tax," he said. "That said, advisors should temper expectations around its broader impact."
But would this tax break help buyers break into the market?
"The bill should encourage seniors to sell these properties, thereby increasing the supply of more affordable housing units in the market," according to Bush. The bill "also modifies some negotiation parameters, as seniors would be competing for first-time buyers."
However, the bill "does not address structural housing affordability issues such as interest rates, zoning, or construction costs, and it may modestly tighten rental supply in certain markets." He added that the five-year window for the tax break "may restrict behavioral change if clients doubt its permanence."
If enacted, "advisors would want to integrate this provision into tax-aware retirement income, real estate disposition, and estate planning conversations, particularly for clients nearing or in early retirement who hold appreciated non-primary residences," Bush relayed.
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