Outdated Tax Law Stifles home Sales, Worsening Housing Market

‌ Updated June 5, 2025
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Soaring home prices nationwide are making ⁤it ‍increasingly difficult for younger ​generations to ⁢buy property. A key factor exacerbating this ⁤issue is a​ decades-old tax law that discourages older homeowners from selling, thereby restricting the supply of available homes.

In‌ 1997, congress⁣ established a⁣ capital gains tax exemption of up to $500,000‌ for married couples selling a home. this provision allows couples to avoid paying taxes ⁣on profits up to that‍ amount, provided⁤ they have ⁢lived in the ⁢residence for ‍at least two of the‍ preceding five years.

However, ‍while housing prices and inflation have surged over the past 28 years, the capital gains exemption has remained unchanged. This makes the exemption less valuable, particularly ⁢in high-cost markets ‌such as California, Florida, and New York, leading to more homeowners ⁤paying​ capital⁢ gains taxes.

According to a 2024⁤ CoreLogic ​report,nearly 8% of U.S.‌ homes ‍sold in ​2023 exceeded the $500,000⁢ capital gains tax limit for married ‍couples, compared to just 3% in 2019.In the early 2000s, only about 1.3% of existing ‌home⁣ sales surpassed the exemption limit.

Ken DeLeon, founder of deleon Realty, argues that this “outdated” tax code provision needs reform. He believes it actively reduces housing supply and undermines⁣ the American dream of homeownership. The capital gains tax, secondary_keyword_1, and housing‌ market are all intertwined.

The⁤ current law encourages older owners to ⁢hold onto their homes longer, especially married couples who benefit from the stepped-up basis rule. This ‌rule allows⁤ the surviving spouse to inherit the house⁢ with its value “stepped up” to the fair market value ​at the time of their partner’s death, avoiding capital gains ‌going forward. The lack of housing supply, secondary_keyword_2, and rising prices​ are⁣ all affected.

Faced with possibly massive tax bills, many homeowners prefer to stay put, effectively locking out potential buyers and waiting to benefit from the stepped-up⁢ basis rule.

“You’re almost⁤ stuck,the family​ home becomes almost ⁤sort of a prison,”​ DeLeon said,noting‍ the unfortunate⁣ implications‌ for homeowners considering their options.

DeLeon also points out that state capital gains taxes can further ⁣compound​ the problem, ‌potentially‌ pushing the total ‌tax burden above 30%. This notable financial obligation can deter homeowners from⁤ selling, even⁣ if​ they stand​ to make a substantial profit.

DeLeon suggests ​indexing the exemption to inflation as ‌a straightforward solution.⁤ while this ​wouldn’t solve ​the overall housing shortage, it could increase the⁢ number of homes​ on the market, particularly in areas like San⁢ Francisco. The capital⁢ gains tax ⁢exemption, housing market, and inflation are key factors.

“It’s really just very ​kind ⁤of inefficient,” DeLeon said. “Young families ‌don’t ‌have the supply ⁢of homes that they want, and ‌then you have senior citizens who ‌cannot​ enjoy the last chapter of their life because they‍ are cash poor but house rich, but they can’t really leverage that.”

In states like California, Proposition 13 further complicates matters⁤ by limiting property taxes for long-time homeowners, providing even less incentive to sell.

This ​creates a‌ negative feedback‍ loop: high capital gains taxes discourage selling, reducing supply. persistent demand drives prices up, ironically increasing ​capital gains even⁣ further. The combination of factors⁤ makes ​selling less‍ appealing, especially in areas where even‍ modest homes have seen significant price gratitude.

“Mom and​ pop, they just maybe ⁣got a little lucky in ⁢where they bought ⁤and had ​a lot⁣ of appreciation,”⁤ DeLeon said. “We’re just kind ⁢of penalizing people.”

What’s next

Lawmakers​ may‌ consider proposals to adjust‍ the capital ⁣gains tax exemption to​ better reflect current market conditions and alleviate pressure on‍ the housing supply.