Capital Gains Taxes on Houses

Over the weekend, President Trump was riffing in front of a microphone and said that he’d be looking into legislation to eliminate the capital gains tax on residential real estate.

For review:

• Singles pay taxes on gains in excess of $250,000.

• Married couples pay taxes on gains in excess of $500,000.

This law has been in place since 1997.

Now, eliminating capital gains taxes on residential real estate sounds like a good thing, right? I am always and everywhere in favor of getting rid of a tax. Let me ask you a question: How many people pay this tax? You would be surprised to learn that only 1–2% of all home transactions result in a taxable capital gain. Obviously, these are the very expensive houses owned by very rich people. Again, I have nothing against eliminating taxes on the rich, but I bet you were probably surprised, and most people were surprised to see how few people this tax affects.

I almost paid capital gains taxes when I sold my house last year. I bought it in 2015 for $1,092,500 and sold it in 2024 for $1,550,000. Not quite above the $500,000 threshold. And there is a pretty good likelihood that I will never have to pay capital gains taxes on a house in my lifetime—we have no plans to leave our current house, even if we get old and croak. They will bury me here. The house will get sold by the executor of my estate.

The average person, with the average $400,000 house, who sells it for $475,000, never has to think about this tax. If you make a million dollars in capital gains on a house, then you have to pay the long-term gains rate of 20%.

Some Better Ideas

Instead of dorking around with capital gains taxes on real estate, why not lower marginal rates?

I wish I was a taxpayer in 1986, when we had the following rate structure:

• Under about $20,000: 16%

• Over about $20,000: 28%

The closest we have come in the history of the income tax to a flat tax. By the way, $20,000 in 1986 is about $80,000 in today’s dollars.

I currently pay the 37% top marginal rate. Congratulations to me are in order. You may not have considered that newsletter writers get socked with taxes worse than just about everyone else. All pass-through income, with nothing to deduct and nothing to depreciate. I think my effective tax rate last year was actually over 37% when taking into account Social Security and Medicare taxes. So yes, newsletter writers are big proponents of lowering marginal rates. I think a 28% top marginal rate would be dandy.

But that is not what Trump has in mind. You may have heard that he wants to eliminate all income taxes on people making less than $200,000 a year, and adding another, higher top bracket at $1,000,000 in income of 40%. What are the implications of this? Well, it turns out that only 5% of taxpayers have incomes of $200,000 a year, which would mean that the entire federal tax burden would fall on only 5% of the population. I mean, great for poor and middle-class people but very bad for rich people. 

By the way, the revenue impact of that would be a loss of $1.1 trillion—the bottom 95% of taxpayers pay $1.1 trillion in revenue, a little more than one-fifth of total revenues. I think Trump’s thinking here is that their contribution is so insignificant that we should just eliminate the paperwork drill and forget the income taxes. I take the opposite view—even if you live in some hollow in West Virginia, you should fill out the return and send in a $100 check to the government. That is your contribution. Everyone needs to have skin in the game.

More and More Progressive

With each successive tax “reform,” the tax brackets have been getting more and more progressive. Top rates have gone up, and bottom rates have gone down. You have probably heard the stats that the top 1% of taxpayers pay 42% of all income taxes. That progressivity would exist even under a flat tax—rich people still pay more—but it would not be as extreme. From a budget management standpoint, having your tax base be so top-heavy introduces a lot of volatility into your revenue collection, subject to boom/bust cycles in the economy. The government will be running big deficits in bad times.

16/28 or fight: That is my motto. Go back to 1986. And while we’re at it, simplify the dang tax code. We’re doing a little bit of that, like eliminating the residential energy tax credits, but we also introduced a tax deduction on interest on car loans. I mean, really simplify the tax code. Get rid of all these little tweaks and behavior modifications. Or you can just eliminate the income tax and go to a consumption tax. All good ideas. As for the real estate taxes, Trump is a real estate guy, so yeah.