Boomers aren’t moving out of their big homes. These are the reasons

WASHINGTON (CNN) — After 33 years and four children, baby boomers Marta and Octavian Dragos say they feel trapped in what was their dream home in El Cerrito, California.

Both over 70, the Dragos are empty nesters, and like many of their generation, are trying to find a way to downsize from their 3,000-square-foot, five-bedroom home.

“We’re here in a huge house, without family nearby, trying to make wise decisions both financially and for our well-being,” says Dragos, a retired teacher.

But for many homeowners like the Dragos family, selling and resizing isn’t easy, attractive or financially beneficial.

Many boomers whose homes have appreciated in value now face hefty capital gains taxes when selling. This is a type of tax on profits from the sale of an investment or asset, such as a house, that has appreciated in value.

Moreover, there aren’t many tiny houses or apartments in the neighborhood that they like so much. And with current prices and mortgage rates so high, there’s often a negligible cost difference between your current home and a smaller home.

“For now we’re staying where we are,” Dragos says. “It is better to be firm than to do something we regret.”

Fewer older homeowner sales are part of the reason housing inventory is historically low and prices are at an all-time high in markets across the United States.

Empty nesters of this age tend to own larger homes, three bedrooms or more than millennials with children.

Dragos says he understands that, as homeowners, they have enviable problems. After all, they own an asset whose value has skyrocketed.

But when she and her husband sit at the dining room table discussing the math of the disease (what’s left after capital gains tax, what happens if he dies first, what happens if she leaves before him), she says Nor do they see good alternatives. To get rid of their home while retaining an acceptable amount from their sale, which they want to use to fund their retirement.

Here are some of the obstacles that many older homeowners say they face.

Capital gains tax reduces the benefits of the sale

Federal and possibly state capital gains taxes can be significant for long-term homeowners whose equity has been growing over several decades.

Most homeowners do not have to pay capital gains on their home when they sell it. Thanks to a 1990s tax law, gains of up to $250,000 for a single taxpayer or $500,000 for a couple filing jointly are tax-free. As long as the sale involves the owner’s primary residence and meets other requirements, such as having lived in the property for two of the last five years.

This means that if a couple bought a house with an average price of $100,000 in 1987 and lived in it as a primary residence and sold it today for $550,000, the $450,000 gain on that investment is not taxable because the US$500,000 is deducted. From capital gains tax.

However, if the same buyers who invested US$100,000 have lived for 37 years in an area that has experienced tremendous growth in home values, as has happened in many parts of California, and their home now sells for US$2 million , so that means about US$. A profit of $1.9 million, of which only US$500,000 is exempt from tax.

A taxable profit of $1.4 million at an average rate of 15% would mean those owners would face a tax bill of more than $200,000.

“It’s more than a small pill to swallow, it’s a serious matter,” said Peter Poulsen, a retired physicist who sold their home of 35 years in Livermore, Calif., with his wife last year and moved to a retirement community.

They paid off the equity and moved because their home was different and they wanted to be close to services, healthcare and other people in their old age. But they were frustrated with the current system, as they say most of the increase in their house prices was due to inflation.

“Exclusions are based on property values ​​from several years ago,” Poulsen says. “None of it is indexed to inflation. An exclusion of $250,000 per person? That’s not enough in a state like California.”

Last March, California Rep. Jimmy Panetta introduced the “More Homes on the Market Act.” The bill increases the tax exclusion for gains on the sale of a primary residence and requires an annual inflation adjustment of the increased amount. It is sponsored by a bipartisan mix of nearly three dozen lawmakers, but is currently stalled in Congress.

A few small houses

Many neighborhoods with long homes for older homeowners are developed for single-family homes and contain few smaller homes or multi-family properties such as condominiums or rental buildings.

This type of housing is often referred to as the “missing middle ground” of housing.

Although this sector is underfunded and restricted in many areas, some communities are slowly changing this situation by allowing the construction of separate apartments within small-scale apartment buildings and accessory dwelling units such as single-family lots or “granny flats”. .

The availability of residential buildings won’t happen overnight, and allowing the construction of freestanding apartments isn’t a sufficient solution, but some boomers may find that they can move out of their larger homes if they can build an accessory dwelling unit on the property. of an adult child.

Savings after selling a bigger house and buying a smaller house are negligible

Older homeowners who want to live in a tiny home are intimidated by how expensive a tiny home can be in today’s market.

For example, an owner who makes a full profit on a house he sells for US$500,000 may find that an apartment in the same area, where he can age in peace, is worth US$450,000.

After accounting for real estate agent fees and closing costs, the profit barely covers the new purchase, much less provides any additional retirement income.

Many homeowners wonder why they should renovate their home if there is no significant benefit or savings in doing so.