CNN Goes Full Loon Tune on Taxes

January 30, 2024

We know that it is against the Republican religion for rich people to pay taxes, but many of us didn’t know that CNN was part of the church. It told us loud and clear in an absolutely crazy piece on why baby boomers are not leaving their homes.

The question that article seeks to address is why baby boomers in big houses are not selling them and moving into smaller houses or apartments. The main explanation is taxes.

That might seem implausible on its face, since the federal government exempts the first $500,000 in gains on a house from taxes, and only applies the 20 percent capital gains tax above that. (Actually, almost all households would only pay a 15 percent capital gains rate. The 20 percent rate highlighted in the article applies only to households with income above $550,000, which would be the top one percent of households. However, a huge gain on a house could put someone in this category.)  

As a practical matter, very few households will have gains of more than $500,000. If someone bought a home 20 years ago for $200,000 and sold it today for $700,000, they would pay zero tax. And, since this is a marginal rate, if they sold it for $800,000, they would only pay $15,000 in taxes.

It is difficult to believe that a couple that stands to pocket $800,000 from selling their home would be too discouraged by having to pay $15,000 in taxes. Remember also that the taxes only apply to gains after deducting realtor fees and other transactions costs. Also, anyone who has been in their house a long time, the group which is the focus of this piece, has almost certainly paid off their mortgage, so this is all money in their pocket.

The case highlighted in the piece is someone selling a home for $2 million in California, almost two and a half times the median house prices of $830,000 for the state.

“However, if those same $100,000 homebuyers lived for 37 years in an area that has seen enormous growth in home values — as is the case for many parts of California — and their home now sells for 2 million dollars, that’s nearly $1.9 million in profit, of which only $500,000 is excluded from taxes.

“The taxable gain of $1.4 million at 20% would mean those homeowners are facing a $280,000 tax bill. In a state like California with additional tax, the overall payment would be over $450,000.”

It would be reasonable to question even in this case how much of a disincentive the tax would be. After all, even after paying the tax they would be putting $1,550,000 in their pocket (on a $100k investment), a pretty good sum to support their retirement. But the more important point is that CNN is trying to explain what is presumably a large-scale phenomenon, baby boomers staying in big houses they don’t need, based on an example that would almost certainly apply to far less than one percent of this demographic group.

To start with their focus is California, a huge state, but still only 12 percent of the U.S. population. There are few places outside of California where homes have seen any comparable run-up in prices. It is also necessary that people lived in their homes a very long time. Even 20 years ago, the house that sells for $2 million today in California probably sold for $500,000 to $1,000,000, implying far less by way of capital gains.

And, for houses to net a homeowner $2,000,000, after realtor fees and other transactions costs, it would have to sell for around $2,200,000 million. This is close to three times the median price for a house in California.

In short, CNN has used what would have to be an incredibly rare scenario in order to explain what it claims is a widespread problem. That might be useful if you’re trying to scare people about taxes, but it is not good reporting.


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