Recently, one of my Instagram followers asked about a candidate’s proposal to tax unrealized capital gains. This is also known as a wealth tax. If such a tax passed Congress, and if the proponents of the plan could work out all the troublesome details, the impact on the real estate market would be devastating.
How Would the Wealth Tax Work?
Here’s how the tax would work. Households with a net worth of $100 million or more would pay a minimum tax of 25% of their combined taxable income and unrealized capital gains. The tax only applies to stocks and other tradeable assets, not real estate or private equity investments.
Note: Capital gains is the increase in an asset’s value. According to the IRS, the current capital gains tax rate ion assets sold in the first year is the same as the income tax rate.. The tax on anything sold after that is 0%, 15%, or 20%, depending on the taxpayer’s income tax bracket. Unrealized capital gains is the increase in value of the asset whether it is sold or not. No one is currently taxed on unrealized capital gains.
Stocks, bonds, and publicly traded commodities would be taxed according to the unrealized capital gains reported on the statement. In some cases, the unrealized tax rate of 25% would be higher than the realized rate. This could cause a mass sell-off in the stock market to avoid the unrealized tax. That would cause a stock market crash and possible recession.
The U.S. Congress is the only body that can change the tax code. This means the bill would need the majority approval of both the Senate and the House of Representatives.
Effect on Real Estate
How would the wealth tax affect the real estate market? Like any tax, it would act as a general drag on the economy. Most tax increases are minor. A 25% tax increase would be a shock, possibly throwing us into a recession. Many wealthy people have the ability to hold their assets anywhere. Rather than pay a 25% tax each year, they may just move their assets to a country without such a tax. Many would sell all their U.S. assets to avoid the tax altogether. This could cause a housing crash.
Bottom Line
It’s unlikely that a wealth tax would ever be passed. If it were, the administration of it would take years to implement. Before that even happened, it would slow the economy as wealthy families moved their assets out of the country. This would have such a negative effect that the tax would be repealed before it ever saw the light of day. (Sources: Tax Foundation, “The High Cost of Wealth Taxes,” June 26, 2024. IRS, “Topic no. 409, Capital Gains and Losses.”)
