Your boomer parents are probably living in a house too big for them. They’re frozen in place because of taxes, top economists say

Core Insights - The outdated capital gains tax caps are identified as a significant factor contributing to the "lock-in effect" in the housing market, preventing millions of homes from being sold and impacting families in need [1][4] Group 1: Lock-in Effect - Many empty-nest seniors are "locked in" to larger homes due to the fear of incurring steep capital gains taxes, which discourages them from downsizing [2][3] - This issue is particularly severe in high-cost metro areas, where selling even modest homes can lead to substantial tax bills, resulting in a misallocation of housing resources [3][4] Group 2: Tax Code and Solutions - The capital gains exclusion caps established by the Taxpayer Relief Act of 1997 have not been adjusted for inflation or home price growth, leading to significant tax burdens for homeowners wishing to move [4][6] - Proposals suggest indexing the exclusion caps to inflation or home price growth, which could alleviate the lock-in effect and increase housing inventory by enabling empty nesters to downsize [6] Group 3: Economic Implications - The phenomenon of "everyday millionaires" highlights that many Americans, despite having inflated asset values, cannot afford the taxes associated with selling their homes, further complicating the housing market [5] - A hypothetical example illustrates that a widow selling her home could face over $100,000 in taxes, which represents more than 20% of her downsizing proceeds, emphasizing the financial impact of the current tax structure [7]