How Eliminating Capital Gains on Home Sales Could Impact Housing Market

Newsweek

a day ago

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President Donald Trump said he's "thinking about" eliminating the federal capital gains tax on home sales, in a move that experts are welcoming while warning that it would favor wealthier homeowners more than anyone else.
"We are thinking about...no tax on capital gains on houses," Trump told the press on July 22, showing support for a proposal that was first floated by Representative Marjorie Taylor Greene of Georgia.
While it is not yet clear whether any real change would come out of either Greene's bill—the "No Tax on Home Sales Act"—or Trump's suggestion, experts already estimate that the change would benefit wealthy American homeowners over low-to-mid-earning buyers, exacerbating existing inequality in the U.S. housing market.
Even so, most agree that a revision of the current capital gains tax system is urgently needed to address the current housing affordability issues.
What Is the Capital Gains Tax on Home Sales?
Homeowners who sell a home on which they have realized a significant capital gain, meaning that they are now selling it for more than they originally purchased it for themselves, are likely to pay a federal capital gains tax on part of that gain.
This is true for long-term homeowners, while those offloading a property within a year of buying it won't have to pay capital gains on the sale.
Homeowners who have lived in a home as their primary residence for at least 24 months in the five years before the sale receive an exemption on the first $250,000 of gains for individuals and $500,000 for married couples filing jointly.
President Donald Trump speaks at the White House on July 30, 2025.
President Donald Trump speaks at the White House on July 30, 2025.
JIM WATSON/AFP via Getty Images
"Put simply, the number of homeowners who pay capital gains taxes on a sale is limited due to these exclusions, but there's a big catch," Realtor.com Chief Economist Danielle Hale said in a statement shared with Newsweek.
"This exclusion was put into place in 1997 and was not indexed for inflation. If it had merely been indexed for inflation when originally enacted, those exclusions would be more than twice as large as they are today ($506k and $1.13M)," she said. "And home price increases have outpaced inflation in many of those years, further eroding the value of the exclusions."
As it is, Hale said, "the cap is most likely to be a problem for homeowners in high-cost states where home prices have appreciated sharply, like California and Massachusetts.
"It may also be an issue for those with above-median priced homes in lower cost states, especially in areas where home prices have increased rapidly and if the homeowners have lived in their homes for an extended period of time, which is more common for older homeowners," she added.
But as property values have skyrocketed since the pandemic homebuying frenzy, more and more homeowners across the country are finding themselves realizing high capital gains, whether they are in expensive areas of the U.S. or not.
How Would Its Elimination Impact the U.S. Housing Market?
Shannon McGahn, executive vice president and chief advocacy officer at the National Association of Realtors (NAR), told Newsweek that her group welcomes any proposal addressing "the outdated capital gains thresholds hurting American homeowners."
According to McGahn, "this is no longer just a concern for high-end properties," but one that is likely to affect more and more American homeowners in the near future.
NAR's research has found that nearly 29 million homeowners, roughly one-third of the market, already face potential capital gains taxes if they sell, "and that number is expected to climb sharply over the next decade," McGahn said.
By 2035, nearly 70 percent of homeowners could exceed the $250,000 cap, according to NAR, "including many middle-class families who've simply owned their homes for a long time in fast-growing markets," McGahn said.
"These tax burdens create a 'lock-in effect,' especially for seniors, discouraging people from selling and keeping much-needed homes off the market," she said.
Increasing the exclusion or eliminating the capital gains tax for home sellers "could enable those who would otherwise face a steep tax bill to sell and downsize or relocate, potentially opening up housing inventory in some of the highest-cost housing markets," Hale said.
"Otherwise, the current tax structure actually incentivizes homeowners who may be facing a large capital gains tax bill to stay in their homes until they die—even if the home is no longer a good fit for their needs," she added.
"This is because when a homeowner passes away, the home receives what's called a stepped-up basis—the amount used to calculate capital gains is reset to the current market value, essentially eliminating any outstanding capital gains liability for individuals with a similar but more nuanced result for surviving spouses."
According to McGahn, eliminating capital gains on home sales is about fairness.
"A homeowner shouldn't be taxed like an investor," she said. "This is about protecting equity and helping the entire market function more efficiently. President Trump's comments reflect growing momentum for reform, and we're encouraged to see this issue gaining attention at the highest levels."
But other experts are skeptical of the impact that eliminating capital gains on home sales could have on American homeowners right now.
"Long-term homeowners in markets that rapidly appreciated over the last 5+ years may feel an additional burden, which could discourage them from selling. However, these taxes generally apply to a relatively small subset of sellers, and are not likely influencing the broader market too severely," Hannah Jones, senior economic research analyst at Realtor.com, previously told Newsweek.
"For sellers in low-to-mid priced markets, the current exclusion is sufficient. The national median listing price was $441,000 in June, which is less than the $500,000 joint exclusion, meaning the typical U.S. home seller is not subject to capital gains tax if filing jointly," she said.
There are also some potential downsides to consider that may follow a potential abolition of the federal capital gains tax on home sales.
"Ongoing affordability issues could be exacerbated by abolishing this tax as it could fuel demand and lead to a more competitive housing market, especially where supply is constrained," Jones said.
"Removing this tax would favor wealthy owners which could worsen equity inequality and make the market even more challenging for low-to-mid earning buyers."