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A tax rule that hasn’t been updated since 1997 is ensnaring millions of homeowners in a hidden home equity tax. Today, roughly 1 in 3 sellers risks paying capital gains tax on their home equity—and by 2030, more than half of homeowners could be exposed.
The problem is most acute for retirees and longtime owners, many of whom face five-figure bills on what experts call “phantom gains”—profits partly created by inflation, not true wealth.
Now, three proposals are competing to rewrite the rules. First up, U.S. Rep. Marjorie Taylor Greene (R-GA) has introduced a plan to eliminate the tax entirely on primary residence sales. President Donald Trump has voiced his support for the idea.
Next up, the bipartisan More Homes on the Market Act would double exclusion limits and then index them for inflation going forward.
Lastly, policy groups are pushing for a more surgical fix: indexing gains to inflation, so only real appreciation gets taxed.
Each approach aims to modernize a system that punishes homeowners for staying put. But they differ sharply on fairness, cost, and impact—raising big questions about who really benefits, and whether a fix could also help unlock desperately needed housing inventory.
The problem with today’s rules
The capital gains exclusion for home sales—set at $250,000 for individuals and $500,000 for married couples—hasn’t budged since 1997. At the time, those figures seemed generous. But since then, home values have climbed more than 260%.
“Given the run-up in house prices, some homeowners, particularly older households who have lived in their homes for a longer time period, have potential capital gains over and above this threshold; thus, a decision to sell a home could mean a hefty tax bill,” explains Danielle Hale, chief economist of Realtor.com®.
Consider a retiree who bought their home 30 years ago. Despite having similarly valued homes on average, senior homeowners face an average federal tax liability of $41,232 when selling, compared with $34,732 for the general population, according to research from the University of Illinois Chicago.
But seniors aren’t the only ones at risk. Today, 29 million homeowners are already potentially exposed to capital gains taxes when selling. By 2030, that share is projected to climb to 56% of homeowners.
That mismatch creates real-world consequences.
“If these homeowners stay put, they face no tax liability; thus, the limit on the capital gains exclusion could mean lower mobility, particularly among older households who have lived in their home for a long time,” Hale says.
This is why think tanks, lawmakers, and even the president are weighing proposals to fix what’s become a hidden home equity tax. Without action, the cost will fall not only on homeowners—whose largest source of wealth is often their home—but also on a housing market desperate for more inventory.
Proposal 1: No Tax on Home Sales Act
One of the boldest ideas on the table comes from Greene, the GOP representative from Georgia, who has introduced the No Tax on Home Sales Act. The bill would eliminate capital gains taxes entirely for homeowners selling a primary residence, regardless of how much profit they walk away with. Crucially, the elimination would not apply to real estate investors or home flippers.
Trump has said he’s “thinking about that,” signaling his potential support for the plan.
Greene frames the proposal as a win-win. By removing the tax bite, she argues, more older homeowners would feel comfortable selling, which could free up desperately needed housing inventory.
“This is a great gift for the American people, and it’s very core to what we were founded on,” Greene told Realtor.com® in an exclusive interview.
The National Association of Realtors® has also backed the concept in principle, saying homeowners shouldn’t be taxed like speculators or investors.
“We welcome any serious proposal that addresses the outdated capital gains thresholds hurting American homeowners. This is no longer just a concern for higher-end properties,” says Shannon McGahn, NAR executive vice president and chief advocacy officer.
But critics warn that the benefits would be highly uneven. With no cap on excluded gains, the biggest windfalls could go to wealthier homeowners in high-cost markets who have seen their properties appreciate by millions.
It is also estimated that the proposal could cost $6 billion a year in lost revenue, money that currently helps fund other priorities.
Proposal 2: More Homes on the Market Act
Similarly, the bipartisan More Homes on the Market Act, introduced by U.S. Reps. Jimmy Panetta (D-CA) and Mike Kelly (R-PA) in February, would double the exemption to $500,000 for individuals and $1 million for married couples, while also indexing it to inflation so it keeps pace with rising home values.
Supporters say the measure would go a long way to reducing the disincentive that keeps some homeowners from selling, while taking less of a bite out of the federal budget.
“Building equity shouldn’t come with a penalty—it should come with opportunity,” McGahn says. “Homeownership is the primary way middle-class Americans build wealth, with homeowners having nearly 40 times the net worth of renters. Congress intended to incentivize homeownership and not hit the middle class with a giant home equity tax.”
Advocates also argue the policy could still free up millions of homes, bringing much-needed turnover to a supply-constrained market.
The bill has become a central talking point for NAR and its members, who say restoring fairness to the tax code would give middle-class homeowners the flexibility to move without fear of being hit with a hidden home equity tax.
Proposal 3: Indexing for inflation
The last proposal is the most complex. To understand it, it helps to see how inflation erodes savings over decades.
Take $200,000 in 2015. Back then, that sum had the buying power of about $276,455 in today’s dollars, according to the Bureau of Labor Statistics CPI calculator. But if you’d saved that money in 2015, it would be worth just $200,000 in today’s money—a hit of nearly 40%.
Now imagine you had put that money into an account earning 3.5% interest annually. By 2025, it would grow to just over $282,000. On paper, that looks like a tidy $82,000 profit. But once you factor in inflation, the real gain is closer to $5,000—because roughly $76,000 of that “profit” was simply keeping pace with rising prices.
This is why many investors turn to real estate, long considered a hedge against inflation. But as home prices and inflation have soared, more long-term homeowners are finding themselves unexpectedly hit by capital gains taxes—sometimes on “phantom gains” that reflect inflation rather than true appreciation.
That’s the problem the National Taxpayers Union Foundation and groups like the Cato Institute want to solve. Their proposal: Index capital gains for inflation. Instead of taxing the full difference between the purchase price and sale price of a home (plus improvements), the tax basis would be adjusted upward for inflation, so only real gains are taxed.
To visualize this, I like to consider the example of my parents. They bought their home in Phoenix in 1988 for about $60,000, later adding a $20,000 pool. At the height of the market, their home was worth about $700,000. If they’d sold for this price, their taxable gain would have been $620,000—$120,000 above today’s exclusion cap for married couples.
But if their original $60,000 purchase price were adjusted for inflation, the cost basis would rise to about $167,500, and the pool to roughly $38,000. Their overall basis would have jumped to $205,527, and their taxable gain would have fallen to about $494,000—comfortably under the cap, with no unexpected tax hit.
It’s important to note that this differs from simply raising the exclusion cap. If the cap were inflation-adjusted, it would stand at about $660,000 for single filers and $1.32 million for married couples today. Advocates argue that raising the cap disproportionately benefits wealthier households, while indexing the basis helps everyday savers by ensuring they’re taxed only on actual returns.
Without indexing, effective tax rates can even exceed 100%—meaning some homeowners pay taxes on what amounts to a real loss, according to the Cato Institute.
Which is best for the housing market?
Any of these proposals is likely to help the housing market, says Hale. So which path is best? It may depend on whether the goal is inventory or equity.
If the aim is fairness and modernization, indexing offers the cleanest fix. Updating the caps falls somewhere in between—a politically feasible middle ground that provides real relief, but not without costs.
“Adjusting the cap for inflation is a more targeted relief program that is likely to limit eligibility and costs to the government, but leaves the possibility of tax liability continuing to impact some homeowners and therefore affecting their decisions,” she explains.
If the priority is unlocking homes in a market starved for listings, eliminating the tax may have the biggest short-term punch.
“Removing the capital gains tax on housing entirely removes any distortions on buy-sell decisions, but does mean that this source of government revenue goes away, so there is a trade-off for politicians to consider,” Hale adds.
What’s clear is that doing nothing is the least sustainable option. Without reform, more than half of homeowners could face capital gains exposure by 2030, further discouraging mobility and leaving billions in locked-up equity off the market. The real question for lawmakers isn’t whether to act, but how far they’re willing to go, and who they believe should reap the greatest benefit.