Rhode Island Homeowners Burdened by High Capital Gains Taxes

Categories: Rhode Island Business NewsRhode Island News

Rhode Island homes amidst rising real estate values and tax concerns.

News Summary

Rhode Island homeowners are increasingly facing a financial burden due to high home equity that exceeds federal capital gains tax exclusions. A new study shows that nearly half of homeowners are impacted by the stagnant $250,000 exemption threshold, as home values have surged over the years. The rising real estate market is forcing many to reconsider selling their homes, leading to a ‘stay-put penalty’ that exacerbates housing supply issues. Proposed legislation aims to address these concerns and provide homeowners with relief from taxation on equity gains.

Rhode Island homeowners are facing a significant tax burden as nearly half have accrued home equity that exceeds federal capital gains tax exclusions amid rising real estate values. A recent study reveals that 47.2% of homeowners in the state now have home equity surpassing the federal capital gains tax exemption threshold.

The findings indicate a troubling trend: 89.2% of Rhode Islanders have surpassed the $500,000 threshold established for capital gains tax exemption available to married couples. Since 1997, the federal capital gains exemption has remained stagnant at $250,000 for individual homeowners and $500,000 for joint filers. This lack of updates, in light of soaring home prices, has increasingly burdened homeowners selling their properties.

Nationally, home values have skyrocketed more than 260% since the late 1990s, greatly diminishing the relevance of the capital gains tax buffer. In Rhode Island, capital gains on real estate are taxed as income, with rates reaching as high as 5.99%. For homeowners selling their homes, this could translate into combined costs amounting to tens of thousands of dollars.

Homes purchased in Rhode Island during the 1990s or early 2000s for under $200,000 have seen substantial appreciation, particularly in coastal towns and suburbs of Providence. Consequently, many long-term homeowners are now confronted with the difficult decision of whether to move or stay put. In fact, many are adopting what is referred to as a “stay-put penalty”—a mindset that discourages downsizing or relocating to avoid capital gains tax liabilities. This reluctance is exacerbating the current housing supply crisis.

Rhode Island ranks in the middle tier among Northeastern states concerning exposure to capital gains taxes. Massachusetts tops the list with 62.3% of homeowners surpassing the $250,000 exclusion, followed by New Jersey with 50%, New Hampshire at 46.2%, and Connecticut with a notably lower rate of 23.9%.

This trend of increasingly taxing capital gains is especially impacting middle-income homeowners as average home values continue to rise. Projections indicate that by 2035, nearly 70% of U.S. homeowners may exceed the $250,000 cap, while more than 38% could exceed the $500,000 threshold. The average federal tax liability for homeowners who surpass these exemptions is expected to reach approximately $74,708 by that time.

In response to these growing concerns, legislation has been proposed in Congress called the “More Homes on the Market Act.” This act aims to double the exemption thresholds and adjust them according to inflation, providing relief for homeowners facing taxation on their equity gains.

As home equity values continue to rise in Rhode Island, it is crucial for homeowners—especially those who have experienced significant property appreciation—to be aware of the potential hidden costs associated with home equity taxes when they consider selling their homes. Understanding the implications of capital gains taxes can aid homeowners in better navigating the complexities of real estate transactions and planning for their financial futures.