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’s more than a little pill to swallow, it’s a serious issue,” said Peter Poulsen, a retired physicist, who together with his wife sold their home of 35 years in Livermore, California, last year and moved into a retirement community.

They paid the capital gains and moved because their home was isolated and they wanted to be closer to conveniences, health care and other people as they aged. But they were frustrated by the current system because they say a lot of the increase in value of their home was due to inflation.

“The exclusions are based on real estate values from many years ago,” said Poulsen. “None of it is indexed to inflation. A $250,000 per person exclusion? In a state like California that doesn’t quite do the job.”

Last March, California Representative Jimmy Panetta introduced the “More Homes on the Market Act.” The bill increases the tax exclusion of gain from the sale of a primary home and requires an annual inflation adjustment to the increased amount. It is co-sponsored by a bipartisan mix of nearly three dozen lawmakers, but is currently going nowhere in Congress.

Emotional Attachment

Many neighborhoods where older homeowners have long lived are zoned for single-family homes and have few smaller homes or multi-family properties like condos or rental buildings.

This kind of housing is often called the “missing middle” in housing.

While this sector has been underbuilt and, in many areas, forbidden, some communities are slowly changing this by allowing for the construction of smaller scale apartment buildings and accessory dwelling units like granny flats.

Availability of apartment buildings isn’t going to happen overnight and allowing granny flats isn’t enough of a solution, but some Boomers may find that they can move out of their larger home if they can build an accessory dwelling unit on an adult child’s property.

Savings after selling a big home and buying a smaller one are negligible

Older homeowners who want to downsize have been scared into staying put by how expensive a smaller home would be in the current market.

A homeowner who keeps all the profit of a home that sells for $500,000, for example, may find that a condo in their same area, where they can age in place, is $450,000. After calculating realtor fees and closing costs, the profit hardly covers the new purchase, let alone provides any extra income for retirement.

Many homeowners are asking why they should downsize if doing so isn’t that much cheaper.