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Example 1: I stay in House 1 for 5 years, it goes up in value by $250k, and I sell it, then I pay $0 tax. And I do the same for House 2 for 5 years, and it went up $250k and I sell it, then it is $0 tax.

Example 2: suppose I don't like to move often, and I don't want to pay the 6% commission to a realtor that often, and I stayed in House 1 for 10 years, then when I sell it, it went up $500k and I have to pay capital gain tax for the $250k, which can be $80k?

And if in example 1, it went up $300k for both houses, then I just pay capital gain tax on the first $50k and the second $50k. But if in example 2, it went up $600k, then I have to pay capital gain tax on the $350k.

Why is it that I "have to" move often and pay commission? Should I have the freedom to not move that often and pay the same amount of tax?

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    If you're married, the exclusion is $500,000. – RonJohn Oct 2 at 17:47
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    Buy and sell "the median" house in the US and you are unlikely to encounter the stated issue. The 10 year median price change is $120K. fred.stlouisfed.org/series/MSPUS – user662852 Oct 2 at 18:23
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    If you want to change tax laws you need to contact your congressional representatives. Though in this climate I'd be shocked if there were any tax change that would only benefit those with large capital gains. – D Stanley Oct 2 at 19:00
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    The literal answer to "Why?" is "That is the code (law)." The answer to "Why is the code that way" is a political question, not necessarily suitable for this site (there is a politics SE) – Damila Oct 2 at 19:35
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There is no logic to tax rules. Politicians identify a "problem" then write legislation to "fix" it. The limits are whatever could be negotiated and passed.

You could also ask why is there a capital gains exemption at all?

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    actually, I run into the problem of: when I bought the house, say, it was $500k, and cup of cappuccino is $1.75 and bowl of beef noodle was $5. When I sell the house, it was $1M, and cup of cappuccino is $3.75 and bowl of beef noodle is $10. My house really is not worth "more" if considering the prices of everything, yet I have to pay tax on the "gain", and that makes me poorer and poorer every time I sell. – nopole Oct 2 at 17:41
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    Further, in example 2, you assumed a new level of risk in buying a house that could just as well have decreased in value after you bought it; in example 1, a decrease after 5 years would simply have lowered your capital gain rather than resulted in an immediate capital loss. – chepner Oct 2 at 17:49
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    @nopole prices doubling in 10 years suggests a 7% inflation rate, which is not consistent with US prices. So either you've been in the house longer than 10 years or your prices are made up. – D Stanley Oct 2 at 18:59
  • @DStanley it was just an example... just make it 10 or 15 years... and in my original question I never said what the base was. In my comment above, I never said it was 10 years – nopole Oct 2 at 19:03
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    It's the case with literally everything though.... buy a hypothetical stock that keeps up with inflation you're still paying taxes based on the capital gains. – xyious Oct 2 at 19:45
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I understand where you're coming from. Our house is worth approximately $500k more than we paid for it 9 years ago, and as the market keeps rising we keep accumulating tax liability for when we sell. But we don't want to sell it, yet. Yes, this leaves us with a higher tax bill than people who are willing to move to avoid paying taxes, but not by much. You can pay the IRS or you can pay the realtor, U-Haul and lower back pain.

So, yes, there are tax incentives for selling your primary residence before the capital gain exceeds US$250k per person (as long as you've been living there for at least 2 of the previous 5 years). As has been mentioned in comments, if you think that's a perverse incentive, contact your congressional representative. I suspect you will be drowned out by the realtors' lobby, but you can try.

Oh, and if you're getting $250k capital gain (each) on your house every 5 years, congratulations! It could be much worse.

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This is more of a political question, so....

The exemption from capital gain taxes for a primary residence should be understood in context of the subsidization of home ownership that the US practices. The default would be for you to pay taxes on every cent in gains, but the US sees value in more people owning their own homes, and so exempts some gains as a subsidy.

Why is this limited? Because the US doesn't see the need to subsidize the homes of rich people.

Why is this set at $250k for single people, and $500k for couples? Because those numbers covered most middle-class housing in 1997, when those numbers were set. They're a little on the low side now, but even now you'll be fine outside of a few cities with a runaway housing market.

  • couldn't it be: if you stayed there for the last 5 years, then exemption is $450k, and if you stayed there for the last 10 or 15 years, then exemption is $650k. Otherwise, the frequent movers are the people who'd benefit and non-movers are the ones who'd lose more. Also instead of absolute number such as $250k, it might be more fair if it is percentage, because in some regions, house prices might be $350k and $250k is a big percentage to deduct, but in regions with house prices $800k (and expensive to live there), then $250k is a small percentage to deduct. – nopole Oct 3 at 8:03
  • so if the number $250k is from 1997, then it is 22 years outdated. Also, the number $250k might be suited for a particular city in a particular state, but what about other cities in the same state and other cities in other states? – nopole Oct 3 at 9:01
  • Yes, the law is imperfect. If you don't like it, talk to your Representative. – user3757614 Oct 3 at 15:38
  • I just did a calculation: if we incorporate a 2% increase per year due to inflation, the number $250k should really grow to $386k today, and if it is 3% inflation, to $479k. How come we don't have a 2% increase automatically built in, I wonder? We know 10 years later won't be the same as 10 years ago... not to mention 22 years now – nopole Oct 3 at 17:54

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