It’s well known that babyboomers are counting on home equity for their retirement security. The run-up in home prices (now ending) is a big comfort to millions of near-retirees who did not have the same success in setting aside other forms of retirement savings.

But according to an article in Kiplinger’s Retirement Report, a 1997 tax law change intended to simplify the taxation of profits on home sales may end up taking a big bite out of home equity/retirement savings:

Many home sellers are discovering that a law that appeared to guarantee that almost all home-sale profit would be tax-free doesn’t always work that way. In 1997, Congress declared that up to $250,000 of profit would be tax-free—that amount doubles to a cool half-million if you’re married and file a joint tax return—if you own and live in the house for two of the five years leading up to the sale. At the time, most advisers figured it would be rare for homeowners to ever again owe tax on home-sale profit.

But the housing boom that has relentlessly pushed up prices in much of the U.S. has thrown a wrench into that reasoning. Although there are no hard figures, it’s clear that an increasing number of home sellers are reaping such large paydays that the IRS is demanding a share. The excess profit is taxed at the 15% long-term capital-gains tax rate.

Before the law changed, home sellers could put off the tax bill on any amount of profit by buying a new home that cost at least as much as the one they sold. But the chance to roll over profit from one home into the next no longer exists. Whether or not you buy a new home, any gain in excess of the $250,000 or $500,000 cap will be taxed.

In some situations, the tax bite could make retiring homeowners rethink their home equity extraction strategy and re-consider the reverse mortgage option. One of the main obstacles for senior homeowners considering a reverse mortgage are the high fees. But compared to a 15% excess gain tax bite on top of a 5%-7% real estate commission, the reverse mortgage fees may not seem exorbitant.

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A Few More Related Articles of Interest:

The Reality Retirement Calculator - assessing needed income for retirement

Americans Need a Reality Check About Their Retirements

FAQ: Reverse Mortgages and Taxes

Top 10 Reasons People Get a Reverse Mortgage

‘Guaranteed Income Gap’ Study Has Implications for Reverse Mortgage Borrowers