The supply of homes for sale in Milwaukee remains tight, keeping prices up and reducing options for potential home buyers. Some housing experts and politicians say there would be more homes on the market if there are changes to capital gains tax policies.
Mike Ruzicka, president of the Greater Milwaukee Association of Realtors, says at any given time, the metro Milwaukee area needs another 5,000 housing units on the market to meet the demand.
"Even though over the last couple months our numbers are showing a little bit more listings coming on each month, it's incrementally about what it’s been." Ruzicka adds, "It's still really, really low, which is why prices are going up so much."
Ruzicka says the challenging inventory is a long-standing problem. "It’s been a growing issue for going on 15, 20 years, really since the Great Recession. We lost a lot of developers and a lot of new home builders during that recession, and since then we’ve not been producing the houses we were before the recession."
There are a couple of bills in Congress that proponents say would help get more homes on the market, by changing federal capital gains tax rules on home sales. Proponents argue the current policy penalizes some people who are considering selling their homes, which results in them staying put.
Local broker associate Amanda O’Day is among those reluctant homeowners. She says she’s not selling her home right now due to the potential of having to pay a capital gains tax. O’Day says she bought her house for around $300,000 about five years ago. She says now, the home is worth over $500,000. And since she’s a single tax filer, she’d have to pay a tax on the difference.
"You already have to pay a tax when you sell. You have to pay a transfer tax and different things like that. But now you add the capital gains on top of it, and really people just stay in their houses longer if they want to not have to pay those taxes," O'Day says.
Kurt Paulsen, a UW-Madison professor of urban planning, says rule changes could encourage people like O’Day to sell.
"The main political argument for reform is that you have large numbers of older homeowners who are living in larger homes that are not being recycled and turned over to younger families. They don’t want to get hit with the capital gains tax and so they’re just staying in the house," Paulsen says.
Under the Taxpayer Relief Act, home sellers can exclude a portion of their profits from taxes if they meet specific criteria, including that the home was used as the primary residence for at least two of the five years prior to selling.
"That current exclusion is $250,000 for a single filer, or $500,000 for married filers. Those exclusions were written into the law in 1997," Paulsen says.
Paulsen says those federal exclusions no longer apply to as many people as they once did. That's because the rules haven’t been updated in the nearly three decades since they were adopted.
"At the time, very few people had $500,000 in capital gains. But given the fact that those dollar amounts have not been adjusted for inflation, now you see large numbers of households that maybe are above that exclusion amount," Paulsen says.
One bill in Congress, the More Homes on the Market Act, would double current exclusion limits and adjust them for future inflation. Another measure, the No Tax on Homes Sales Act, would eliminate federal capital gains taxes on the sale of primary residences.
Any federal capital gains tax rules changes would not affect capital gains taxes imposed by states. Missouri recently eliminated its capital gains tax for individuals, becoming the first state to do so.
The National Association of Realtors backs changes in the federal capital gains tax for homes. Evan Liddiard is the director of federal taxation for the organization.
He estimates that current federal rules result in capital gains taxes for 34% of home sellers who are single filers, and for 10% of married filers.
Liddiard says instead of paying a chunk of their profit to the government, many older or long tenured homeowners prefer to remain in their houses until they die, then pass on the home to their heirs.
But Mike Ruzicka, the president of the Greater Milwaukee Association of Realtors, is not convinced that changing the capital gains tax would greatly impact inventory in metro Milwaukee. He says there's simply not enough overall supply to go around.
"The capital gains exemption is not really going to do much to encourage existing owners to sell because if they don't have somewhere to move there's no point in selling," Ruzicka says.
Support for Seeking Solutions: Keys to Homeownership is provided by Educators Credit Union, Greater Milwaukee Association of Realtors and Geis Garage Doors.
