How to Get More Homes on the Market

Owning a home has always been central to the American Dream, and one of the most reliable ways for families to build middle-class wealth. But that dream is getting harder to reach. Since 2000, home prices have more than tripled, while incomes have only doubled, putting homeownership further out of reach for millions of Americans.¹ In high-cost areas, the divide is even starker.

For those who bought long ago, this rapid appreciation has created a different challenge. A home purchased for tens of thousands of dollars decades ago might now be worth over a million. Owners may want to downsize for a litany of reasons—maybe the kids have since moved away or a retirement community would be a better fit. Yet, selling it could trigger a massive capital gains tax bill, effectively trapping older homeowners in place. Research shows that in high-cost regions, many seniors delay or avoid downsizing to avoid that tax hit.

This dynamic keeps badly-needed housing off the market at a time when supply is already strained. To expand access to homeownership and make better use of our existing housing stock, it’s time to modernize the home sale capital gains tax. This memo explains the problem and offers a practical solution to help unlock more homes—because every policy that removes a barrier to supply should be on the table.

The Problem

The primary residence capital gains tax exemption allows eligible homeowners to exempt a portion of home sale profit from their taxable income—$250,000 for single filers and $500,000 for married couples filing jointly.² How does that work? Capital gains are the difference between a home’s selling price and buying price (excluding costs of major renovations).³ To qualify, the home must have been owned and occupied by the seller for at least two of the previous five years.⁴ Home sale profits exceeding these exemption limits are taxed at a long-term capital gains tax rate of 15% or 20%, depending on total taxable income.⁵

But here is the problem: the capital gains exemption thresholds have not been changed since 1997.⁶ Since then, home prices nationally have gone up by 264%, while prices in high-demand markets like New York City (337%) and California (402%) surged even further.⁷ According to one academic study, over a third of homeowners would be subject to capital gains taxation if they sold their house today. Without policy changes, that share will double by 2035.⁸

This tax threshold has failed to keep pace with housing inflation, leaving some homeowners to face a daunting tax bill upon the sale of their homes. This is especially true for older homeowners who bought their homes decades ago at far lower prices. Ninety percent of potentially “locked-in” households, those deterred from selling due to tax exposure, purchased their homes over 20 years ago.⁹ This locked-in effect constrains the supply of available homes and limits mobility in the housing market. 

A Solution: Reduce the Tax Lock

Given the need to look at all options to get more homes on the market, policymakers should reduce the tax lock on home sales by increasing the primary home capital gains exclusion. This could be done in a variety of ways:

The More Homes on the Market Act: Representatives Jimmy Panetta (D-CA) and Mark Kelly (R-PA) led a bipartisan bill (H.R. 1340) to double the existing capital gains exclusion to $500,000/$1 million and let that exclusion continue to adjust for inflation in the future.¹⁰ This solution would drastically reduce the home tax lock while giving predictable, automatic updates.

A one-time inflation adjustment: Many parts of the tax code adjust automatically for inflation—marginal brackets, credits, and deductions all rise over time to prevent stealthy tax increases. The home sale exclusion, however, has been frozen since 1997. Doubling the current caps to $500,000 for individuals and $1 million for joint filers would roughly restore their real value after nearly three decades of inflation, though still below the pace of national home price growth.¹¹ This option would cost less than indexing the exclusion to housing prices, but without automatic adjustments, the real value of the benefit would again erode over time, recreating the same pressures on homeowners a decade or two down the road.

Expand tax relief for older or long-term owners only: A third option could create an additional tax exclusion for home sellers either 65 years and older (or Social Security recipients) or those who have owned and lived in the home for at least 15 years rather than the current five-year requirement. Policymakers could set this additional exclusion at $250,000 for single filers/$500,000 for married filers which would, in practice, double the exclusion for this particular group. This type of reform would target these tax benefits to the groups most effected by tax lock: long-time homeowners and retirees looking to downsize.

Notably, raising the exclusion would carry a fiscal cost. The current provision already reduces federal revenues by roughly $56 billion per year, and doubling the cap would have at least tens  of billions in forgone revenue over a 10-year budget window, especially if more homeowners choose to sell.¹² Some of that loss could be partially offset: older owners who are currently “locked in” might sell rather than hold until death, generating taxable gains that would otherwise escape taxation under the step-up in basis. A more generous proposal would cost more; a one-time adjustment or targeted treatment would cost less. Still, in an environment of high interest rates and constrained housing supply, any expansion of this benefit should be paired with credible offsets—either through other tax adjustments or spending savings—to avoid putting upward pressure on borrowing costs and undercutting the policy’s affordability goals.