O
wning a home is a significant responsibility, requiring regular updates and maintenance. In return for their efforts, homeowners expect to achieve financial security when they sell. However, an outdated tax policy threatens this goal, causing a ripple effect that impacts the entire market. New research commissioned by the National Association of REALTORS reveals that the current federal policy on capital gains taxes is distorting the housing market, locking in older homeowners and stifling inventory.
The Hidden Cost of Appreciation
Under the current tax law, homeowners can exclude up to $250,000 in capital gains from the sale of a primary residence. However, this cap has remained unchanged since 1997, despite rising home values over nearly three decades. According to the study, 34% of homeowners (29 million) could already have enough equity to exceed the $250,000 cap, and over 10% (8 million) could surpass the $500,000 threshold.
By 2030, more than 56% of homeowners could have equity exceeding the exclusion limit, and by 2035, that number is projected to rise to nearly 70%. In states with high-priced markets like California, Massachusetts, and Colorado, the trend is even more pronounced. The "stay-put penalty" disincentivizes seniors from selling their homes, delaying moves they might otherwise make.
The reluctance to sell means fewer homes are available for younger buyers, squeezing entry-level and move-up inventory and driving up prices. To address this crisis, NAR supports the More Homes on the Market Act, a bipartisan bill that would update the capital gains exclusion thresholds for the first time in nearly 30 years. The legislation proposes to double the exclusion to $500,000 for individuals and $1 million for married couples, adjusting the caps to reflect future inflation.
By modernizing this outdated provision, the act would restore fairness to the tax code and bring much-needed fluidity back into the housing market. According to NAR, building equity shouldn't come with a penalty – it should come with opportunity. Congress created the exemption to incentivize homeownership, not hit the middle class with a giant home equity tax.
