Holding Court is a series by retired Rye City Court Judge Joe Latwin. Latwin retired from the court in December 2022 after thirteen years of service to the City.
What topics do you want addressed by Judge Latwin? Tell us.
By Joe Latwin
It seems all the politicians want to create more housing. However, these same politicians created or continue a policy that limits the housing market.
Let’s create the scenario. In 1980, a couple bought a house in Rye for $100,000 when they were 25 years old. Since then, the cumulative inflation is 294.2%. The current value of that $100,000 adjusted for inflation would now, in 2025, be $394,174.76 solely due to inflation. Today the house has a fair market value of $1,250,000. The couple is now 60 years old, retired and their kids are grown and out of the house. If the couple were to sell the house, they would have a capital gain of $1,150,000. From that, if the couple has lived in the house as a primary residence for 2 of the last 5 years, they would get a $500,000 exclusion from capital gains for a net taxable capital gain of $650,000. That would be taxed as ordinary income at about 33% combined federal and state or $215,000. If the couple died owning the property, it could pass to the heirs without any capital gain or tax on the gain because of a step up in basis.
The couple is considering moving, thinking they could downsize to live in smaller quarters, or perhaps move into an assisted living facility. The couple has a choice of paying $215,000 or dying with the property. Some choice. Our tax laws have made the couple prisoners to holding on to the property or paying a substantial tax. The rational choice is to stay put. The couple will not downsize; they will not sell to another family in need of housing. New housing stock will ultimately have to be built new for younger families. The house will be off the market. Fewer housing will be available for young families.
Want to open up the housing and free the imprisoned couple? Reduce the capital gains tax. Here are several options to do that, either singly or together.
- Eliminate the capital gains tax on primary residences. To prevent speculation in real estate, you may limit the exclusion to those people over a certain age – say 55. You can require that the sellers have owned the property and used it as their primary residence for a certain number of years – say 15 years.
- Index the capital gains to the inflation rate. Why should you pay a tax on inflation – you didn’t do anything to increase the value other than hold the property – it was the politicians printing money deflating the value of the dollar and thus increasing prices. This would also encourage the government to rein in inflation instead of profiting from it.
- Reduce the capital gains tax on residences to a lower rate perhaps with the above conditions – say 10%. The lower rate would not be as large an impediment to selling property.
Putting more properties on the market will tend to drive prices down and provide more housing without the need to build more housing stressing land and the environment.
The way the tax code is set up helps set up the lack of affordable housing and raise housing costs – an unintended consequence. It is time to fix it.
