Housing Crisis: Tax Law & Young Buyers
- Soaring home prices nationwide are making it increasingly difficult for younger generations to buy property.
- In 1997, congress established a capital gains tax exemption of up to $500,000 for married couples selling a home.
- However, while housing prices and inflation have surged over the past 28 years, the capital gains exemption has remained unchanged.
Outdated tax laws are stifling home sales and worsening the housing crisis, especially for young buyers. decades-old capital gains tax exemptions, primary_keyword, haven’t kept pace with soaring home prices and inflation, leading many homeowners to face hefty tax bills if they sell.The outdated exemption, secondary_keyword_1, particularly impacts markets like California, Florida, and New York, where housing supply, secondary_keyword_2, is already strained. Experts, including Ken DeLeon, advocate for indexing the exemption. This critical issue affects housing nationwide, so News Directory 3 closely monitors the situation. Discover what’s next in the debate around capital gains tax exemption reform and how it might reshape the market for both sellers and purchasers.
Outdated Tax Law Stifles home Sales, Worsening Housing Market
Updated June 5, 2025
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Ken DeLeon, founder of deleon Realty, argues that this “outdated” tax code provision needs reform.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.