Help for the Housing Inventory Problem.
The biggest issue today is a lack of housing inventory. Buyers are everywhere, but how do we get sellers?
What about a Capital Gains Exemption?
A simple solution may be an FTT or Financial Transaction Tax. We could allow for an exemption of any capital gains on investment property sold in the next 12 months and instead, have a 2 % FTT tax on the transaction. Any seller of investment property is currently subject to a gain taxable at either regular rates (short term) or a slightly lower rate for the long term. The problem is people who have held investment property for a long time will have taken depreciation over the years for a tax credit so they may have to take a huge tax hit while selling. Hence all the 1031’s. In my experience, many small investors were unsure of how the capital gains would impact them and were afraid to sell.
What if we had a seller exempt from capital gains on the specific transaction if a 2% FTT was paid from the proceeds? This would be at the seller's option or pay a regular gain. The intent is obviously to create more supply to sate the pent-up demand for homeownership. The exact metrics can be fine-tuned but this would make an excellent opportunity to create a new supply for buyers, an urgency to sell for investment property owners and an opportunity for the real estate community. There is much discussion about Biden eliminating or altering the current capital gains rules, this would only further curtail the availability of owner-occupied housing. An FTT on the sale would do the opposite and generate revenue.
Covid weary landlord sellers would be better able to gauge the cost of selling and the conversion of rentals to owner-occupied properties would be healthy for many urban areas.
Covid and the aftermath have rewritten all the rules and now there are no rules. I think this is an idea that should be explored. This may actually increase tax revenues since capital gains are only realized by selling and if an investment property owner doesn’t sell there is no gain. This will simply create more sales and more homeownership.
Is this a solution that should be explored?