Weakness in the U.S. Housing Market

The U.S. housing market is facing some concerning signs of decline—inventory levels are at historic lows, baby boomers are choosing to stay in their homes, and overall mobility appears to be stalled. A significant factor? The capital gains exclusion for home sales has remained unchanged since 1997, even though home prices have nearly tripled since then. Modernizing this provision by adjusting the exclusion limits and tying them to inflation could help alleviate the housing supply issue, promote downsizing and relocations, and revive a market that has been relatively stagnant.

Interestingly, this might even lead to an increase in tax revenue.

Back in 1997, when Congress first established the capital gains exclusion for the sale of a primary residence, the median home price in the U.S. was around $139,000. Fast forward to April 2025, and that median has ballooned to $414,000—a staggering increase of 198%. In areas with high living costs, like San Francisco or New York, median home prices often soar past $1 million. However, the capital gains exclusion has remained stuck at $250,000 for individuals and $500,000 for couples since it was introduced almost three decades ago.

The Federal Reserve Bank of Minneapolis points out that $250,000 in 1997 is roughly equivalent to $500,000 today, while $500,000 would be around $1 million. This decline in the exclusion’s value means that it now covers a smaller portion of capital gains for homeowners, particularly in pricier areas.

Take, for example, a couple who bought a home in California for $300,000 in 1997 and sells it for $1.2 million in 2025. After applying the $500,000 exclusion, they could face a taxable gain of $400,000, which could lead to owing over $95,200 in federal capital gains tax (including the 20% rate and the additional 3.8% Net Investment Income Tax). Had the exclusion been adjusted for inflation, they wouldn’t owe anything, allowing them to keep more money for retirement or relocating.

This stagnation hits long-term homeowners, particularly baby boomers, the hardest. Many are hesitant to sell due to the tax implications, leading to a situation known as “lock-in.” This issue contributes to the inventory crisis, with existing home sales in 2024 at their lowest levels in nearly 30 years. As of the end of April 2025, inventory stood at just 4.4 months of supply, far below the 5-6 months regarded as a balanced market.

Modifying the exclusion amounts to reflect their inflation-adjusted values from 1997 and linking them to inflation would help fulfill Congress’ original goal to protect most homeowners from capital gains tax when selling their primary residences, thus fostering mobility and supporting the housing market.

At first glance, one might think increasing the exclusion looks like a tax cut that would diminish federal revenue. However, the opposite could actually be true!

By reducing the tax barriers, these changes would motivate homeowners—especially baby boomers with considerable housing wealth—to sell their properties and explore new living options, whether that’s downsizing or moving into retirement communities. A surge in home sales would lead to multiple revenue sources for the Treasury:

• Even with an increased exclusion, some homeowners will still incur taxes on gains exceeding $500,000 or $1,000,000, notably in high-cost areas.
• Home sales generate transfer taxes, property taxes (based on reassessed values in certain states), and income taxes for real estate professionals, all of which benefit federal, state, and local finances.
• Moreover, heightened home sales boost construction, home improvement, and consumer spending, as both sellers and buyers invest in new properties, significantly contributing to GDP. In 2018, the National Association of Realtors estimated that every home sale generated around $67,000 in economic activity, a figure that adjusts to about $86,000 today.

In response to this, sixty-one members of Congress, led by Representatives Jimmy Panetta (D-CA) and Mike Kelly (R-PA), have proposed legislation—H.R.1340, known as the “More Homes on the Market Act”—aiming to double the exclusions and index them for inflation.

By incorporating these changes into the House-passed reconciliation bill, lawmakers can honor Congress’ original intentions. It stands out as a unique policy that benefits homeowners, the housing market, and the economy as a whole. It’s time to seize this opportunity and make it happen.