Home Sale Exemption Changes

Under current law, taxpayers are permitted to exclude up to $250,000 of gain from certain qualified property sales or exchanges (generally, sales of the taxpayers’ primary residence under circumstances that satisfy certain ownership and usage requirements). Married taxpayers who file joint returns can exclude up to $500,000. Recently, Democrats in the House introduced a bill that would expand this exemption for taxpayers age 55 and up. Under the proposal, taxpayers age 55+ would be able to increase their gain exclusion by the amount of qualified contributions that they make to Roth IRAs. Taxpayers would only be permitted to increase the exclusion if they had not previously treated the Roth contributions as qualified rollover contributions.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions on this new proposal.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: This type of incentive is a valuable way to encourage taxpayers who are closing in on retirement age to fund a Roth IRA. Traditional retirement accounts are, of course, valuable. Taxpayers should be encouraged to fund a variety of retirement income sources with differing tax treatment to put themselves in a tax-smart position during retirement. Giving taxpayers in this pre-retirement age group an actual tax incentive to do so is a smart way to get Americans to diversify their savings.

Byrnes: I don’t think there should be any limit on the amount of gain that can be excluded from income on sale of a home in the first place. Why are we talking about personal residences as though they’re really some kind of investment that should subject taxpayers to even higher taxes if they choose to move?

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Bloink: We have to think of any real estate holding as an investment—or we risk creating a tremendous tax loophole for the super-rich, and one that these wealthy Americans would not even have to plan to take advantage of. Section 1031’s like-kind exchange rules now only apply to exchanges of real estate. Ordinary, hardworking Americans almost never have the opportunity to take advantage of a Section 1031 exchange of real estate. We have to remember that the gain exclusion is geared toward everyday Americans, but also has to be limited in order to function as it’s meant to function.

Byrnes: Well, the Roth income and contribution limits are so low that this proposal would make only a moderate difference in the first place. Sure, some taxpayers might be able to save a few thousand in taxes if their residence has appreciated substantially over the years. Even if this bill becomes law—which it probably won’t anytime soon—we need to go further to make any kind of difference.

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Bloink: This bill would encourage taxpayers to think more holistically. Retirement income security requires a package of actions. Taxpayers need to think about their residence as a part of their asset package. They also need encouragement to think about ways to generate tax-free income during retirement—because Roth IRA contributions don’t provide any current tax benefit. In fact, the Roth contribution will usually cost the taxpayer today because those funds could otherwise be funneled into an account offering a current tax preference.

Byrnes: A personal residence should not be considered an investment because, to be blunt, everyone needs a personal residence. You sell one primary residence; you replace it with another. Taxpayers who aren’t walking away with some windfall gain shouldn’t be punished because they decide to move. Deciding where to live should not require some kind of complex tax analysis.