End or reduce capital gains tax on housing to incentivize home sales

by Mark Coleman and Jonathan Helton, Grassroot Institute

Housing prices across the U.S. are nearing historic highs relative to median household incomes, and many Americans can no longer afford to buy a home in the cities where they live. 

Federal, state and local regulations that make it extremely costly to build a new home are a big reason, but tax policies also have major effects on the housing market. That’s why at least 90 U.S. House members have sponsored a bill that would update how the federal capital gains tax applies to home sales.

Called the More Homes on the Market Act, it would double exclusions for home sales and adjust them annually for inflation going forward. At the same time, the Trump administration has shown interest in removing the capital gains tax for homes entirely. 

The idea behind both proposals is to remove the disincentive for existing homeowners to sell, since doing so currently leaves them with significant tax bills.

Any profit that homeowners make from selling their homes is considered a capital gain, taxable by the federal government at 15 percent after allowable deductions — although the rate can go as high as 20 percent, depending on certain factors.

In addition, 42 states also tax such capital gains, with rates ranging from 2.5 percent in Arizona to 14.4 percent in California. For Californians, that could mean paying a tax rate of almost 30 percent of taxable gains on the sales of their homes. 

The last big positive changes to the federal capital gains tax on homes were made almost 30 years ago, when Congress passed and President Bill Clinton signed the Taxpayer Relief Act of 1997. That law allowed single filers to exclude up to $250,000 in profits, and married couples up to $500,000, from sales of their principal residences. At that time, the national median sales price for new single-family homes was just $145,000. Even in Los Angeles and Honolulu, the median prices for single-family homes were only $180,722 and $307,000, respectively. 

Unfortunately, the exclusion amounts have never changed, even as the price of homes has spiked. Today, median home prices top $500,000 in many areas, and desirable metropolitan areas such as Boston, Honolulu and Los Angeles see median sales at or above $1 million.

Consider a Honolulu couple who wants to move closer to their children in Nevada. They bought their home in 1985 for $150,000, but it’s now worth $900,000 — a $750,000 difference. 

The $500,000 exclusion under the 1997 law and an allowable deduction of $50,000 for the money they spent on renovations would bring the taxable amount down to $200,000, at which point the 15 percent federal capital gains tax would kick in.

Add Hawaii’s 7.25 percent capital gains rate, and now the couple is looking at a tax bill of at least $40,000. Understandably, this might cause the couple to reconsider selling — a behavior confirmed by research. 
For instance, a 2008 study out of the Federal Reserve Bank of Atlanta found that the 1997 tax changes “had an economically important and statistically significant impact on the residential mobility of under-55 homeowners.”

Furthermore, the study said, “the bulk of this effect was concentrated among highly mobile homeowners who a priori were more likely to have wanted to trade down (e.g., divorced, empty nesters), those facing higher capital gains tax rates, and those living in states that had experienced higher rates of nominal appreciation.”

A 2012 study by the Federal Reserve Board of Governors showed similar results for the real estate market in high-cost Boston. 
Based on experience, then, adopting the proposed More Homes on the Market Act would likely loosen up the national real estate market by removing a major reason some people choose to stay in their current homes rather than sell.

From the federal government’s point of view, it would have only a minimal impact on tax collections, since federal capital gains taxes on home sales account for between only $6.5 billion to $10 billion a year of the federal government’s annual revenue of more than $5.23 trillion.

There is a lot more that Congress and the Trump administration — and those 42 states — could do to make housing more abundant and affordable. But reducing or eliminating capital gains taxes on home sales would be an excellent place to start.

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Mark Coleman is the communications director and Jonathan Helton a policy analyst at the Grassroot Institute of Hawaii.

This commentary was first published on Dec. 12, 2025, in The Hill under the headline “To help lower housing prices, repeal capital gains taxes on home sales.”

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