I have a selfish perspective on this issue. As I wrote last September (consider this column to be Part B), I’ve been in the same house for more than 30 years. It’s a big house, but all my kids are now on their own. Logically, I should sell.
But if I sell, the government will grab a big chunk of my gain (even though a big part of the gain simply represents inflation over the past three-plus decades).
If I stay in my house until I die, by contrast, the kids won’t get hit with the capital gains tax.
As such, since I love my kids more than I love government, I’m not selling.
This problem can and should be fixed.
Ryan Ellis summarized the issue in an article for National Review.
…87 percent of Americans worry about housing costs, and 69 percent fear that their children or grandchildren will never be able to afford a home. These concerns reflect real pressures: Home prices remain high, mortgage rates have increased, and the supply of affordable homes is historically tight. Federal tax policy is making the problem worse. Under current law, homeowners may exclude only $250,000 in capital gains if single, or $500,000 if married, when selling a primary residence. These limits were set during the Clinton administration in 1997 and have never been adjusted for inflation or for rising home values. After nearly three decades of appreciation, many ordinary homeowners already exceed these thresholds, and millions more are on the horizon. A tax rule that once protected most sellers now exposes millions of them to a substantial bill, all from gains derived by inflation (itself caused by the Federal Reserve). …homeowners whose houses no longer fit their needs choose not to sell because the tax consequences are too large. This reduces turnover and limits the number of homes available to younger families seeking entry into the market.
Ryan then explains that there is legislation that would mitigate the problem.
H.R. 1340, the More Homes on the Market Act, addresses this problem directly. The bill would double the capital gains exclusion to $500,000 for single filers and $1 million for married couples and would index those amounts to inflation. Modernizing the exclusion would allow homeowners to sell or change their housing without being penalized for decades of normal appreciation. …H.R. 1340 avoids the pitfalls of heavy-handed interventions. It does not subsidize demand, impose new regulations, or require new spending. It simply removes a federal barrier that prevents homeowners from responding to normal life changes. Families will still sell only when it makes fiscal sense. This reform would merely eliminate an outdated and unintended income tax penalty that blocks ordinary residential mobility. Both YIMBYs and NIMBYs can support this tax cut.
Since it’s my role to analyze rather than advocate, I mention the legislation mostly because it’s bipartisan.
So this proposed tax change might actually happen even with all the divisions in Washington.
Now let’s get back to policy analysis. Here are some excerpts from a Wall Street Journal column by Jeff Yass and Steve Moore.
Americans are sitting on roughly $55 trillion in nominal unrealized gains in the value of homes and other real estate. That’s one reason why, as home values rose during the recent inflationary period, sales declined from more than six million homes in 2021 to a little over four million in 2025. Millions of empty-nest baby boomers want to downsize and retire but are discouraged from doing so by the prospect of a huge tax bill. That’s called the lock-in effect of the capital-gains tax. It…creates a perverse incentive to store wealth away untouched for decades. A 2020 Brookings Institution analysis put it this way: “Lock-in encourages investors to retain their assets when the economy would benefit from a redeployment of investment capital to higher return ventures or properties.” …One reason aging homeowners don’t sell is because there’s one way of avoiding the capital-gains tax: by dying. When your house passes to your estate, a tax-code provision called the step up in basis at death kicks in, and your gain forever goes untaxed. When your heirs sell the house, they pay tax only on the difference between the value at your death and the sale price.
And Adam Michel of the Cato Institute also wrote recently on the topic.
The capital gains tax encourages holding on to appreciated homes, discourages relocating or downsizing, and raises the after-tax cost of investing in the housing stock. However, these effects are not limited to housing. The economic distortions of the capital gains tax appear whenever an asset is expected to appreciate over time. Homes, businesses, land, stocks, precious metals, artwork, and cryptocurrencies all face the same basic penalty for being sold or exchanged after appreciation. …The lock-in effect also becomes stronger over time. Long-held assets tend to accumulate large nominal gains, and delaying realization can reduce effective tax rates. This is especially true for older owners whose assets will benefit from step-up in basis at death, which allows property to be inherited at its current market value, wiping away the capital gain, and allowing it to be sold with little or no tax. The result is that owners of assets with large potential gains delay sales and avoid reallocating capital to more productive uses to avoid the tax. For example, a homeowner may stay in a house that no longer fits their family or job because selling would trigger a large tax bill.
Here’s the sentence from his article that is most important.
Congress should lower the rate for all investments or, better yet, simply repeal the tax altogether.
