America's housing crisis has a tax problem hiding in plain sight, according to analysts who say an outdated capital gains exclusion for primary residence sales is reducing housing supply across the country. The policy, which was enacted in 1997 and has never been adjusted for inflation, allows homeowners to exclude $250,000 of gain from taxation ($500,000 for married couples) when selling their primary residence.

The thresholds were set when median home prices were approximately $145,000. Since then, home prices have risen 53% while median household income has increased only 24%, according to data cited in the article. According to Federal Reserve Bank of Minneapolis research, $500,000 in 1997 is equivalent to roughly $1 million today, meaning the exclusion's real value has effectively been cut in half over nearly three decades.

What the Left Is Saying

Progressive economists and Democratic lawmakers have acknowledged that updating the capital gains exclusion could improve housing mobility, but many argue it should be paired with more direct affordability measures. Critics from the left contend that the policy primarily benefits wealthier homeowners in high-appreciation states such as California, New York, Massachusetts, Hawaii, and Washington. In California alone, roughly one in four home sellers realizes more than $500,000 in gains on their sale.

Progressive groups have noted that while removing this tax barrier could help supply, the primary beneficiaries would be homeowners who already hold significant housing wealth. Some Democratic economists argue that any inflation adjustment to the exclusion should be accompanied by expanded rental assistance, down payment assistance for first-time buyers, or requirements that properties sold under the new thresholds include affordable units.

What the Right Is Saying

Conservative analysts and Republican lawmakers view the capital gains lock-in effect as a market distortion created by outdated tax policy. They argue that updating the exclusion would be a market-based solution that removes government-created barriers to housing turnover without spending taxpayer dollars or expanding federal programs.

The More Homes on the Market Act, which has attracted bipartisan support with 155 House sponsors and 23 Senate sponsors, would double the exclusion to $500,000 for single filers and $1 million for married couples while indexing both amounts to inflation. Supporters say this approach restores the original intent of the 1997 law and puts more homes back into circulation by eliminating an artificial brake on housing mobility.

Conservative economists argue that increased transactions would generate additional economic activity and tax revenue from gains above new thresholds, potentially offsetting some cost to the Treasury. They emphasize that the objective is not to benefit wealthy homeowners per se but to eliminate a tax penalty that deters them from selling homes that could be purchased by younger families seeking entry into the housing market.

What the Numbers Show

According to data cited in the article, affordable home inventory has declined significantly in recent years. The number of homes listed for sale that are affordable to households earning $75,000 or less has fallen 60% since 2019, according to Realtor.com data.

The lock-in effect appears to be growing over time. Between 2000 and 2003, only about 38,000 home sales annually involved gains exceeding the exclusion threshold. By 2022, that figure had risen to more than 300,000—nearly eight times as many, indicating that tax policy increasingly influences homeownership decisions.

Consider a married couple who bought a home for $300,000 in 1997 and sold it for $1.2 million in 2026. After the current $500,000 exclusion, $400,000 of gain would remain taxable. At a 20% capital gains rate plus the 3.8% net investment income tax where applicable, the federal bill could exceed $95,000. Under an inflation-indexed exclusion of roughly $1 million, that couple would owe no federal capital-gains tax on the sale.

Research by Federal Reserve economist Hui Shan found that the 1997 tax changes increased sales among homes with low and moderate gains while producing evidence of lock-in among homes with very large gains, suggesting homeowners were staying put to avoid tax consequences rather than moving for lifestyle or economic reasons.

The Bottom Line

Congress is considering legislation that would update a capital gains tax exclusion for primary residence sales for the first time in nearly three decades. Supporters say it would remove a tax barrier that discourages homeowners—particularly older residents with significant housing wealth—from selling, thereby increasing supply in markets where additional housing is most needed.

The More Homes on the Market Act has attracted bipartisan support, reflecting recognition across party lines that outdated thresholds may be distorting housing market dynamics. The bill's sponsors argue it represents a targeted approach to improving housing supply without direct government spending or intervention.

Opponents from various perspectives have raised concerns: some worry primarily wealthy homeowners in high-cost states would benefit most; others note the cost to federal revenue. Proponents counter that more transactions would generate economic activity and additional tax revenue while addressing a market problem created by unadjusted policy.

What happens next: The bill will need to advance through committee consideration before reaching floor votes in either chamber. Supporters are seeking momentum heading into future legislative sessions, arguing that inaction means another generation of homeowners will face unexpected tax bills when life circumstances prompt a move.