The tax on capital gains in this case would be 20% federal, ~10% state (in California), 3.8% ACA investment tax. That's an ~34% rate, not the 20% you seem to think applies.
> the only cash you need to come up with is the down payment for the new house
Let's take the simple case where the old house was paid off, no mortgage. Are you suggesting that it's unreasonable to want to downsize and still not have a mortgage?
If you do have a significant mortgage, and are hence highly leveraged, an increase in property prices is pretty good. If your mortgage is more or less paid off, you can in fact end up in a situation where you can't buy any house at all in the same general market after selling your existing one and paying the property taxes. See a worked-out example at https://news.ycombinator.com/item?id=15706565
Second, the 25% rate is an approximate rate that combines the federal and state rates while taking into account the deduction for state and local taxes. 25% is a nice round number. I'm not going to prepare a detailed tax model for an anonymous internet comment.
My point stands either way: he's whining about having to pay an effective tax rate of 10-15% on his profits from selling his million dollar house while people in other parts of the country are struggling to even afford rent. He's acting like an entitled child and quivering about the exact tax rate he pays doesn't change that.
Ah, I didn't realize that, thank you!
> he's whining about having to pay an effective tax rate of 10-15% on his profits
No, the key part of the complaint is that the combination of price rise and tax structure mean that a lateral move requires liquidity he does not have.
It's a first-world problem for sure, but it's still a problem caused by the fact that we have various fairly dumb tax policies.
- Assume all other houses in the area also appreciated the same amount as the poster's house (say 2x).
- Assume the poster will only consider a move within the same area.
Now if they want to make a "lateral" move, they are looking at $2m houses, not $1m houses, since all other houses they would consider - local to their area - also increased in value.
I feel like they should just get a $1m house (yes, a "downgrade") if that's the case and have fun with their near-$1m profits, but what do I know.
I think the one element that the OP is missing is that after the transaction, he is better off by about $130k in tax due to the increase in basis of his home. If he eventually sells and doesn't buy another home in that area, he will realize an additional $130k in profits on the second home that would be lost to tax if he had not sold the first house.
On the second point: the only cash you need to come up with is the down payment for the new house, which you would get out of the proceeds from selling your old house. If you sold your house for 2x the purchase price, you have more than enough cash to pay the down payment. Boo hoo.
Complaints like yours are why people outside of the Bay Area really hate Silicon Valley.