The housing inventory in Denver metro has remained super tight, making it difficult for buyers to find homes. The new tax plan may make matters worse as many would-be-sellers may decide to hang on to their homes for another year or two to avoid capital gains. Currently homeowners can exclude from their taxable income up to $250,00 in capital gains ($500,000 for married taxpayers) from the sale of their primary residence, provided they lived in the home for two of the last five years. The new plan (both House and Senate versions) would change the exclusion rule to require the taxpayer to have lived in the home at least five of the last eight years. Put in context, if you bought a house in Denver just three years ago and you plan to sell in January 2018, you could be selling for upwards of 30% more than what you paid. Under current tax law your capital gain liability would be $0.00 if you sell below the $250,000/$500,00 cap. Under the new plan, with the tenure requirement changed to five of the last eight years, you could be paying a significant portion of your capital gain to the IRS.
According to Zillow analysis, the new tenure requirement for capital gains could cause many short-term homeowners to wait longer to sell, especially in rapidly appreciating housing markets, like Denver metro. Looking at last year’s sales data, Zillow concluded that the tax change – had it been enacted last year – would have affected 11% of home sellers across the U.S. How much impact? It depends on the local housing market. For rapidly appreciating markets, the impact could be substantial. According to Zillow, Denver metro sellers selling in year four would have experienced a substantial capital gains bill (Boulder: $20,419, Denver: $13,832, Centennial: $12,120).
Both the House and Senate bills are written to impact sales beginning January 1, 2018. If passed, many would-be-sellers with only three or four years in their homes may be motivated to stay put for another year or two to avoid a large capital gains hit. In a market like Denver metro — where inventory is at historic lows – pulling many would-be-sellers out of the market could further tighten inventory and drive up prices if demand remains high.