Give Investor-Sellers a Reason to Choose a First-Time Buyer

Congress can help level the field by passing tax incentives for landlords selling single-family homes.
A first-time buyer couple receives keys to their first home

© Getty Images / Peathegee Inc / Digitalvision

If you work with investor clients who purchase single-family properties as investments, consider getting behind a proposal that will incentivize them to sell homes to first-time buyers. Here’s why.

It has never been easy for most would-be buyers to achieve homeownership. Setting aside significant funds for a down payment can take years of patience, sacrifice and discipline. Over the last few years, the down payment challenge for many has been overshadowed by another, often more formidable problem: bidding wars.

Even before COVID-19 changed most aspects of our lives, the inventory of starter homes for sale was tightening. And now, even with interest rates well above the trough of December 2020, bidders can find themselves in competition not only with other first-time buyers, but with cash-paying investors who are adding to their stock of single-family home rentals. The disheartening reality is that the odds are stacked against many people trying to buy their initial home.

Economists with the National Association of REALTORS® estimate that about 2.5 million households shopping for a first home were shut out of the market last year.

The underlying problem, of course, is that America is woefully undersupplied with adequate housing. A 2021 study by the Rosen Consulting Group concluded that due to underbuilding over the past two decades, the U.S. is short by more than 5.5 million homes. The study further found, in order to fill this gap, it would take a 60% increase in construction per year for at least a decade.

The obvious answer to this gargantuan challenge is to change federal, state, and local policies to encourage more home building of all kinds and in all ways, and to be patient, because this problem is going to be with us for a long time.

Reduce Capital Gains Tax for Rental Home Sellers

However, by creating immediate tax incentives for sellers, Congress can help level the playing field between first-time buyers and those who are purchasing single-family homes as investors.

In 2019, NAR adopted policy to support legislation that would offer sellers of single-family rental homes a reduced tax rate on capital gains when the purchaser of the property is a first-time buyer who will occupy the residence as an owner. This simple incentive could be a game-changer for hundreds of thousands because many investors in rental homes have substantial equity and would face significant capital gains taxes if they were to sell.

The bids of those who are seeking their first home would immediately become more attractive to sellers because the after-tax return of the seller would jump markedly.

A 2023 study by economists Andrew Hanson and Ike Brannon found that a 50% reduction in the capital gains tax rate for small investor-owners that sell a property to a first-time buyer would increase single-family home supply by between 67,000 and 146,000 homes. And extending the policy to all but the largest institutional investors could roughly double these numbers, making a significant impact on the supply of starter homes.

The current tax law favors investors over owner-occupiers. While some higher-income home owners can still get tax advantages through the mortgage interest and property tax deductions, they must itemize to gain these. Only about one in 10 tax filers itemize their returns today. Investors, however, are able to fully deduct all interest and tax and other expenses of their rental home.

Making this simple tax policy change would give the American dream of homeownership a fairer shake by leveling the field for those who have sacrificed to buy a home but can’t compete in today’s market.


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