T
he housing market is stalled not only by high mortgage rates but also by a tax rule that keeps many owners from selling. Since 1997 the federal exclusion for capital‑gain on a primary home has stayed at $250,000 for single filers and $500,000 for married couples, even as home values have risen more than 260 %. As a result, roughly 29 million U.S. households—about one‑third of all homeowners—now exceed the single‑filer limit, and that share is expected to climb to 56 % by 2030. These owners face a hidden equity tax if they move, so they hold onto their homes, reducing the supply of listings and tightening the market.
The National Association of Realtors reports that the effect is already visible in resale activity. “If the capital‑gain tax were reformed, the number of homes coming on the market would rise, though the increase would vary by local market,” says Evan Liddiard, NAR’s director of federal taxation. The sellers most likely to respond are not the high‑end luxury buyers; in many hot markets a $1 million home is now a starter price, creating a new class of “accidental luxury” owners—people who bought ordinary homes decades ago and now sit on large, unanticipated gains.
Two bills are shaping the debate in Washington. Rep. Marjorie Taylor Greene proposes to eliminate capital‑gain tax on primary‑home sales entirely, a blunt approach that has lost momentum after she announced she will leave Congress. Rep. Jimmy Panetta’s “More Homes on the Market Act” would raise the exclusion to $500,000 for individuals and $1 million for couples, then index it to inflation so the threshold keeps pace with the market. Panetta’s plan would roughly double the current exemption and restore the law’s original intent to protect everyday homeowners rather than penalize them.
The lock‑in effect is clear when you look at long‑tenured owners. For example, a Phoenix homeowner who bought a $64,000 ranch in 1989 would face a tax on about $200,000 of equity if they sold today at $700,000, even after accounting for improvements and the married‑couple exclusion. This tax burden discourages moves, especially among seniors. Mobility among people 65 and older has fallen from 10 % in the 1970s to about 3 % in 2023, according to the Federal Reserve Bank of Richmond, indicating that many seniors are trapped in place.
The 1997 Taxpayer Relief Act offers a useful precedent. That reform replaced a one‑time exclusion for homeowners over 55 with the current thresholds. Studies found that lowering the tax friction encouraged more people to sell, particularly those near the exemption limit, and increased mobility among early‑50s households by 22–31 %. Those movers were often in high‑appreciation markets, where the expected tax bill was higher, and they were primed to trade down—exactly the situation many long‑tenured owners face today.
If the tax barrier is removed or reduced, supply would rise. More listings would give buyers greater negotiating power, reduce bidding wars, and increase the number of homes that stay on the market long enough to invite price cuts. The effect would not be a dramatic national collapse but a gradual shift in bargaining dynamics that could ease the broader affordability crisis.
Reforming the capital‑gain tax would not solve all housing problems, but it offers a direct mechanism to unlock inventory, increase turnover, and potentially lower prices for buyers. The debate now hinges on whether to eliminate the tax entirely or to index the exemption to inflation, each approach aiming to restore the market’s natural flow and reduce the lock‑in that keeps many homeowners from selling.
