The U.S. housing market is showing troubling signs of weaknessâinventory is near historic lows, baby boomers are staying put, and mobility is stalled. A major reason? The outdated capital gains exclusion on home sales hasnât been adjusted since 1997, despite a near-tripling of home prices.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 thatâs 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 $414,000âa 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 exclusionâs 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 exclusionâpotentially 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.
This stagnation disproportionately affects long-term homeowners, particularly baby boomers. Many baby boomers are reluctant to sell due to the tax hit, a phenomenon known as âlock-in.â This reluctance exacerbates the housing inventory crisis, with existing home sales in 2024 at their lowest level in nearly 30 years. Inventory levels were at just 4.4 months of supply by the end of April 2025âwell below the 5-6 months considered a balanced market.
Adjusting the nominal exclusion amounts to their 1997 inflation-adjusted equivalents and indexing them for inflation would restore Congressâ original intent: to shield most homeowners from capital gains tax on their primary residence, encouraging mobility and supporting the housing market.
At first glance, increasing the exclusion might seem like a tax cut that reduces federal revenue. But the opposite is true!
By lowering the tax barrier, these reforms would encourage homeownersâespecially baby boomers, who hold significant housing wealthâto sell their properties and transition to new living situations, such as downsizing or moving to retirement communities. The resulting surge in home sales would generate multiple revenue streams for the Treasury:
First, even with a higher exclusion, some homeowners will still owe tax on gains above $500,000 or $1,000,000, particularly in high-cost areas
Second, home sales trigger transfer taxes, property taxes (on reassessed values in some states), and income taxes for real estate professionals, all of which bolster federal, state, and local coffers.
Finally, increased home sales stimulate construction, home improvement, and consumer spending as sellers and buyers invest in new properties. Housing activity contributes significantly to GDP. In 2018, the National Association of Realtors estimated that each home sale generated $67,000 in economic activity. Adjusted for inflation, that figure is $86,000
Sixty-one congressmen and women, led by Representatives Jimmy Panetta (D-CA) and Mike Kelly (R-PA), understand this and have introduced legislationâH.R.1340, the âMore Homes on the Market Actââto double the exclusions and index them for inflation.
By amending the House-passed reconciliation bill to include these provisions, lawmakers can restore Congressâ original intent. Itâs a rare policy that delivers for homeowners, the housing market, and the economy at large. Letâs seize this moment to make it happen.
Anne Canfield is a Partner at The Majority Group. James Carter is a Principal with Navigators Global. He previously headed President-elect Donald Trumpâs tax team during the 2016-17 transition and served as a Deputy Assistant Secretary of the Treasury for President George W. Bush.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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