Trump says he is ‘thinking about' nixing capital gains tax on home sales. Here's what that could mean for homeowners

CNN

4 days ago

In comments to the press on Tuesday, President Donald Trump suggested he is considering eliminating capital gains taxes on the sale of homes.
'We are thinking about … no tax on capital gains on houses,' Trump said.
Soon afterwards, Rep. Marjorie Taylor Greene of Georgia posted her thanks to him on X for what she interpreted to be his support for a bill she introduced this month, calling for the elimination of the capital gains tax when someone sells their primary residence.
Will anything come of it? Who knows.
Especially since Trump just signed into law a mega tax-and-spending cuts bill that the Congressional Budget Office estimates will increase deficits on net by $3.4 trillion over a decade while at the same time knocking 10 million more people off health insurance.
But should it become an idea that Congress pursues seriously, it's worth reviewing just how the capital gains tax on home sales works currently and who might benefit most if it were killed.
If you sell a primary residence on which you realize a big capital gain — meaning you sell it for more than you bought it even after accounting for closing fees and qualified home improvement costs along the way — you may owe a capital gains tax on at least some of that gain.
Or not. It depends.
If you sell your house within a year of buying it, any capital gains will be considered short-term and you will have to pay ordinary income tax on all your gains.
But if you have lived in it as your primary residence for at least 24 months (consecutively or not) in the previous five years before you sell it, you may be allowed to exempt from the capital gains tax the first $250,000 of your gains if you're single or $500,000 if you're married filing jointly
Any gains above those thresholds are subject to the long-term capital gains tax. But just how much you'll pay is based on your income, broken out below.
You also may get a break on the capital gains tax if you don't meet the eligibility tests but had to sell your home 'due to a change in employment, health, or unforeseen circumstances,' according to the IRS.
(Note, too, that the capital gains tax rules work somewhat differently when you sell a second home or rental property.)
In 2025, filers will owe 0% in capital gains tax for gains above the exemption threshold if their taxable income is below $48,350 (or $96,700 if married filing jointly), according to the IRS.
They will owe 15% if their income is between $48,450 and $533,400 (or between $96,700 and $600,050 for joint filers).
And any filer with income above those levels will pay a 20% capital gains rate.
In all instances, however, the long-term capital gains tax rate is often below the top ordinary income tax rate a filer faces.
Since the $250,000 and $500,000 capital gains exemption thresholds have not adjusted for inflation since they were set in 1997, a growing number of homeowners, especially long-time ones, may realize taxable gains even if they don't live in the highest-priced areas by today's standards.
Generally speaking, three categories of home sellers are the ones most likely to have to pay the capital gains tax if they make out well selling their home: 1) Anyone living in an area where homes have appreciated greatly in recent years, especially in neighborhoods where home prices are typically well above the national average; 2) anyone who has lived in their home for decades during which time nominal home prices have shot up; or 3) anyone with high income and sufficient wealth to buy a very expensive home wherever they live.
A recent study by the National Association of Realtors, which has advocated for doubling the exemption caps and adjusting them as if they'd been indexed to inflation since 1997, estimates that 29 million homeowners — about one-third — may already have enough equity in their home to exceed the $250,000 cap, while 8 million — or about one-tenth — may have enough to top the $500,000 threshold.
Looking ahead, it forecasts that by 2035, close to 70% of homeowners might have gains exceeding $250,000 and 38% of them will have more than $500,000.
'In states with exceptionally high-priced markets, such as California, Massachusetts and Colorado, the trend is even more pronounced,' the report said.
Broadly speaking, NAR contends, the current caps may be disincentivizing homeowners to sell. 'Over the past 28 years, home price inflation has eroded the value of these exemptions, especially for older homeowners who have lived in their home for 20 years or more. At a time when many of these homeowners are considering downsizing or moving to a retirement facility, more and more are facing gains well in excess of the exclusions, which can leave them owing many thousands of dollars in taxes and reduce their ability to afford a new home.'
In another analysis, the Yale Budget Lab, using the Federal Reserve's 2022 Survey of Consumer Finances, noted that the minority of homeowners who might currently benefit if the capital gains tax were eliminated are largely wealthier, higher-income, and older on average.
'In 2022, homeowners with gains above the exemption had an average net worth of $5.7 million. For homeowners below the exemption, this number was just over $1 million,' the researchers wrote.