Headline: Baby Boomers Struggle to Downsize Due to Skyrocketing Home Prices and Capital Gains Taxes
Washington (CNN) — After 33 years and four children, Marta and Octavian Dragos, both over 70, find themselves feeling trapped in their oversized dream home in El Cerrito, California. Like many baby boomers, they are trying to find a way to downsize from their 3,000-square-foot, five-bedroom home.
The Dragos family, similar to other empty nesters, are facing challenges as they try to sell and downsize. The first problem they encountered is the substantial capital gains taxes that homeowners face when they sell. For long-term homeowners, such as the Dragos, whose home equity has dramatically increased over several decades, these taxes can be crippling.
Despite owning an asset that has skyrocketed in value, the couple is overwhelmed as they navigate through the complex financial implications of downsizing. For many older homeowners like the Dragos, selling and downsizing is not as attractive or financially advantageous as expected.
Capital gains taxes are just one of the challenges. Another obstacle is the scarcity of smaller homes or apartments in the neighborhoods that they like. Moreover, the current high prices and mortgage rates leave older homeowners skeptical about moving to a smaller property due to minimal savings after the sale.
The lack of available smaller homes is a significant issue for older homeowners who are considering downsizing. Neighborhoods predominantly developed for single-family homes have few smaller homes or multi-family properties. This has created a “missing middle sector” of housing that is not adequately addressed in many areas.
Furthermore, older homeowners find that after selling their large houses and buying a smaller one, the savings are negligible, particularly in today’s market where the cost of a smaller home barely covers the profit from the sale of a larger home.
While the Dragos family is currently staying put in their oversized home, many other empty nesters are also staying in their homes, contributing to the historically low housing inventory and pushing prices even higher in markets across the United States.
To address these issues, California Rep. Jimmy Panetta introduced the More Homes on the Market Act, which aims to increase the tax exclusion for the gain on the sale of a primary residence and implement an annual inflation adjustment of the increased amount. However, the bill is currently stalled in Congress despite bipartisan support.
Overall, older homeowners face significant challenges when it comes to downsizing. The combination of high home prices, capital gains taxes, and the scarcity of smaller homes has put many baby boomers in a difficult position as they try to navigate their retirement years in the current housing market.