ANNE CANFIELD And JAMES CARTER: It’s Time To Modernize The Capital Gains Exclusion For Home Sales

The U.S. housing market is showing troubling signs of weakness—inventory is near historic lows, baby boomers are staying put, and mobility is stalled. A major reason? The outdated capital gains exclusion on home sales hasn’t been adjusted since 1997, despite a near-tripling of home prices. Modernizing this provision by updating the exclusion limits and indexing them to inflation would help unlock badly needed housing supply, encourage downsizing and relocation, and inject fresh energy into a market that’s been stuck in neutral.

And, counterintuitively, it may even raise tax revenue.

When, in 1997, Congress enacted the capital gains exclusion for the sale of a primary home, the median U.S. home price was approximately $139,000. By April 2025, that figure had skyrocketed to $414,000—a nominal increase of 198%. In high-cost areas like San Francisco, Seattle, or New York, median home prices often exceed $1 million. Yet the capital gains exclusion remains frozen at $250,000 for singles and $500,000 for married couples, amounts that have not been adjusted since their introduction 28 years ago.

According to the Federal Reserve Bank of Minneapolis, $250,000 in 1997 is equivalent to roughly $500,000 today, and $500,000 is worth about $1,000,000. This means the exclusion’s real value has eroded by half, covering a smaller share of capital gains for homeowners, especially in high-cost regions.

For example, a couple who bought a home in California for $300,000 in 1997 and sells it for $1.2 million in 2025 faces a taxable gain of $400,000 after the $500,000 exclusion—potentially owing $95,200 or more in federal capital gains tax (at a 20% rate, plus the 3.8% Net Investment Income Tax). Had the exclusion been indexed to inflation, their tax burden would be zeroed out, preserving more of their proceeds for retirement or relocation.