One Move to Unlock San Diego Housing Inventory

The One Simple Policy Change That Could Unlock San Diego Housing

If the government really wanted to shake up the housing market quickly, I do not think the fastest path is another attempt to ban investors or one more round of mortgage bond tinkering.

There is a much simpler lever already sitting in the tax code. It gets almost no headlines, but in high cost markets like San Diego, La Jolla, Encinitas and Carlsbad, it could be a game changer.

I am talking about raising the capital gains exclusion on primary home sales from $500,000 up to something closer to $2 million.

Before I go any further, quick disclaimer. This is a big picture discussion, not tax advice. Always talk to your CPA or tax professional about your specific situation.

How the capital gains exclusion works right now

Under current federal rules, if you sell your primary residence in the United States, you can generally exclude up to:

• $250,000 of profit if you are single

• $500,000 of profit if you are married filing jointly

That exclusion number was set in the late 1990s. Think about what has happened to home prices since then, especially in coastal California.

In a lot of the San Diego coastal neighborhoods I work in, prices have not just crept up. They have multiplied.

Which means more and more long time homeowners are blowing past that $250,000 or $500,000 exclusion the minute they start thinking about selling.

The “trapped” San Diego homeowner problem

Here is a very common scenario.

You have a retired couple who bought their San Diego home decades ago for something like $300,000. Maybe it is in North Park, Clairemont, Point Loma, Pacific Beach, Encinitas or Carlsbad.

Today that home is worth 1.8 to 2 million dollars, give or take.

On paper they look fantastic. They have a ton of equity. The problem is that if they sell, they blast through that $500,000 exclusion and face capital gains taxes on a very large number.

So what do they do?

They stay put.
They do not downsize.
They do not move closer to the grandkids.
They do not switch to a one level home that is easier to live in.

And they do not free up that big family home for the next generation of buyers.

Multiply that decision across thousands of Baby Boomer households in coastal markets. You start to see how much inventory is effectively locked up by the way the current exclusion is written.

What if the exclusion was raised to $2 million?

Now imagine a different setup.

Instead of a $500,000 cap for married couples, you bump the capital gains exclusion on primary residences up to something like $2 million.

That same retired couple could sell, take their equity out and:

• Move to a townhome or one story home in the same community

• Relocate to be near family in another part of San Diego or out of state

• Right size into a home that better fits their current lifestyle

They would have real flexibility without a life changing tax bill. Suddenly a huge number of Baby Boomers who feel trapped in their homes for tax reasons now have options that actually pencil out.

If more of those long time owners list their homes, the ripple effects are big:

• More inventory for move up buyers who need larger homes

• More choices for first time buyers who are tired of competing for the same handful of listings

• A healthier, more mobile housing market instead of one where everyone feels stuck

Is this a magic wand that solves affordability overnight? No. But it directly attacks one of the biggest reasons people who want to move are not moving.

Why investor bans and mortgage tweaks have not moved the needle

Compare that to some of the other ideas that keep popping up.

“Let us ban investors from buying single family homes.”

It sounds bold, but once the proposals get written, they usually include a bunch of carveouts and loopholes. And in many markets, responsible investors actually help keep rental inventory available.

Even if you did get a strict ban in place, it is probably not unlocking as many homes for owner occupants as the talking points suggest.

Then there are ideas like having the government buy back mortgage backed securities to try to nudge interest rates down at the margins.

Interesting on paper, but when these things get announced in the real world, rate movements are often small and short lived. Meanwhile, nothing about those programs changes the tax hit facing an owner who is sitting on a seven figure gain.

That seller is still not listing their home.

In other words, we keep trying complex financial engineering while a simple, targeted lever is sitting right in front of us in the tax code.

Would a higher capital gains exclusion change your reality?

Here is the core question I keep coming back to, especially for San Diego and other coastal areas.

If the capital gains exclusion on your primary home was raised from $500,000 up to something like $2 million:

• Would that change your reality?

• Would you finally feel free to sell and move?

• Would your parents be more likely to downsize?

• Would your long time neighbors finally unlock their equity?

My sense is that the number of people staying put mainly because of taxes is bigger than most policymakers realize.

If you are curious how your own numbers might look, I am happy to walk through the real estate side with you, then you can loop in your CPA for the tax side. Even if you are five years out from a move, understanding your position now can help you plan.

And if you are a buyer who feels like there is never anything to buy in your price range, this kind of policy discussion matters, because it goes straight to the inventory problem.

If you have thoughts on this, I would love to hear them. Would a higher exclusion change your behavior or the behavior of people you know?

You can always call, text or email me if you want to talk through what the current market means for your specific situation here in San Diego.