How the Bipartisan Housing Bill Impacts Coronado Real Estate... Or Does It?

While Coronado has been focused on prepping for NASCAR and the onslaught of summer tourists, Congress has been working on the 21st Century ROAD to Housing Act (H.R. 6644 / H.R. 1299), a bipartisan housing bill being described as one of the most significant housing reforms in years. The bill includes proposals aimed at increasing housing supply, limiting institutional investors, streamlining development, and expanding affordable housing.

 

After reading about it, I kept searching to see if the number one thing I think could help increase housing supply was included...

Spoiler alert: it wasn't.

 

The biggest omission from the bill is meaningful capital gains tax reform.

 

Mind you, that doesn't take away from my genuine surprise that Congress appears to be working together on something, but from what I've read, it sounds more like it'll make political headlines than meaningful change in communities like Coronado.

 

The bill may benefit communities that have ample land to build, but Coronado just isn't one of those communities. We're landlocked. We aren't a market dominated by institutional investors, and we're not going to solve our inventory shortage by building thousands of additional homes.

 

And candidly, our price point doesn't garner a lot of sympathy in Congress or across America. But that doesn't mean we don't have a housing problem.

 

The biggest solution to Coronado’s housing problem isn’t creating more housing supply. It's generating housing turnover.

 

For decades, Coronado had a healthy cycle of move-up buyers. A young couple would buy a condo. A few years later they'd move into a starter home. As their family grew, they'd move again. Eventually, many would downsize after the kids moved out. 

 

One decision to move often created three or four additional housing opportunities behind it.

 

Today, that cycle has changed to waiting to sell the family home until someone passes away.

 

People aren’t staying put because they don't want to move. We've simply created too many financial reasons not to. They don't need a reason to stay. They need a compelling reason to move.

The One Change I'd Make

If I could change one thing about the proposed housing bill, it would be to include meaningful capital gains tax reform.

 

Increasing the capital gains exclusion for the sale of a primary residence and, importantly, index it to inflation going forward would be a step in the right direction.

The current exclusion—$250,000 for individuals and $500,000 for married couples—hasn't changed since 1997.

 

If it had simply been adjusted for inflation over the past three decades, today's exclusion would be nearly double what it is today.

 

Imagine a Coronado couple who purchased their home for $400,000 in the late 1990s. Today, it might be worth $2.8 million... or more. Even after the current $500,000 exclusion, they could still be looking at roughly $1.9 million of taxable gain before accounting for selling costs and capital improvements.

 

I recognize that even if the exclusion were increased, they would still owe taxes.

 

That's okay.

 

The goal isn't to eliminate taxes entirely. The goal is to minimize the reasons they feel like they shouldn’t sell.

 

More specifically, it's to reduce one of the financial barriers that keeps homeowners from making a move they already want to make.

 

Ironically, I don't think the biggest beneficiaries of an indexed capital gains exclusion would be homeowners who bought decades ago. I think they'd be the families who stretched to buy into Coronado before—or during—the pandemic.

 

Many bought condos or smaller homes with the expectation that they would eventually move into something larger as their families grew. Today they have equity, but they're also facing higher interest rates, extremely limited inventory, and the prospect of paying capital gains taxes when they sell.

 

And capital gains aren't nominal.

 

Under current law, the combined federal and California tax burden can approach 37% for some homeowners. In other words, a $1 million capital gains exclusion could save a homeowner up to roughly $371,000 in taxes.

 

That's real money.

 

Remember the couple who bought their home for $400,000? With a current taxable gain of roughly $1.9 million, they could face a tax bill approaching $700,000 before all applicable adjustments.

 

For many homeowners, that's reason enough not to move.

 

Combine that tax bill with only a handful of housing options available after they sell, and most simply decide to stay put.

 

Instead, they remodel. Young families add square footage. Older homeowners reconfigure their floor plans so they can age in place. Or they keep the home they own and rent something that better fits their needs.

 

I understand why families are making those decisions. But they create ripple effects throughout the community.

 

Every homeowner who decides not to move is one less home available for the next family hoping to buy.

 

Every family that rents instead of buying places additional pressure on Coronado's already limited rental market. In a community with a large military population that depends on rental housing, that's especially problematic.

 

Capital gains reform has a public relations problem.

 

To many people, it sounds like a tax break for wealthy homeowners. But in communities like Coronado, that's an oversimplification.

 

Many longtime homeowners aren't sitting on large gains because they're wealthy. They're sitting on large gains because they've owned their home for decades in one of the most expensive housing markets in the country. They're teachers, small business owners, military families, retirees, and professionals who bought when Coronado was simply a much less expensive place to live.

 

The narrative on capital gains reform shouldn't be about helping people avoid taxes. It should be about helping people move.

 

Today's tax policy discourages homeowners from selling, and every homeowner who decides to stay put is one less home available for the next family trying to buy.

 

If capital gains reform had a better publicist, I think more people would recognize it for what it really is: one of the few housing policies that has the potential to increase inventory without building a single new home.

 

My Take

Nationally, we're trying to solve a housing supply problem, and I understand why. Most political think tanks are focused on policies that assume there's land available to build.

 

But in Coronado, we cannot create a substantial new supply of homes, so we have to focus on stimulating housing turnover.

 

Most moves here are discretionary, where financial considerations like capital gains can become the tipping point.

 

A homeowner stays because they don't want to give up a 2.75% mortgage. Another stays because the capital gains tax bill makes moving harder to justify. Another stays because they can't find the next house they want to buy.

 

Individually, every one of those decisions makes sense.

 

Collectively, they create a market where fewer homes change hands. And since we can’t immediately change the mortgage rate lockdown, we need to increase inventory by making it easier for existing homeowners to make the move they already want to make.

 

I don't think capital gains reform would solve Coronado's inventory shortage overnight.

 

But I do think it would encourage healthier housing turnover, create more opportunities for move-up buyers, strengthen the local rental market, and ultimately help more families put down roots in Coronado.

Because in Coronado, people don't need a reason to stay. They need a compelling reason to move.