In a recent press conference, President Donald Trump indicated that he is contemplating the elimination of capital gains taxes on the sale of homes. “We are thinking about … no tax on capital gains on houses,” Trump stated. Following his comments, Representative Marjorie Taylor Greene from Georgia expressed her gratitude on social media platform X, interpreting his statement as support for her newly introduced bill aimed at abolishing capital gains tax for the sale of primary residences. But will this proposal gain traction in Congress? The future remains uncertain, particularly as Trump recently enacted a substantial tax-and-spending cuts bill projected by the Congressional Budget Office to increase deficits by $3.4 trillion over the next decade while also potentially affecting health insurance coverage for an additional 10 million Americans.
If Congress seriously considers Trump's suggestion, it's essential to grasp how the current capital gains tax on home sales operates and who stands to benefit if it were abolished. When you sell a primary residence for a profit—meaning the sale price exceeds your purchase price after accounting for closing costs and qualified home improvements—you may incur a capital gains tax on that profit. However, eligibility for tax exemptions plays a crucial role.
For instance, if you sell your home within a year of purchasing it, your gains will be classified as short-term, and you will owe ordinary income tax on the entire profit. Conversely, if you have occupied the home as your primary residence for at least 24 months within the past five years, you can exempt up to $250,000 of your gains if you're single, or $500,000 if you're married and filing jointly. Any gains exceeding these thresholds are subject to the long-term capital gains tax.
Starting in 2025, homeowners will encounter different capital gains tax rates based on their income levels. According to the IRS, individuals with taxable income below $48,350 (or $96,700 for married couples filing jointly) will owe 0% on capital gains above the exemption threshold. For those earning between $48,450 and $533,400 (or $96,700 to $600,050 for joint filers), the tax rate will be 15%. Finally, individuals with income exceeding these levels will face a 20% capital gains rate. It's important to note that the long-term capital gains tax rate is typically lower than the top ordinary income tax rates.
The capital gains tax disproportionately impacts homeowners who may not even reside in high-priced markets. Since the exemption thresholds of $250,000 and $500,000 have not been adjusted for inflation since 1997, more homeowners are realizing taxable gains, even in less expensive areas. Three key groups are particularly affected:
Homeowners in rapidly appreciating markets, especially those in neighborhoods where prices exceed the national average. Long-term residents who have owned their homes for decades and witnessed significant price increases. High-income individuals capable of purchasing expensive properties regardless of location.According to a recent study by the National Association of Realtors (NAR), approximately 29 million homeowners—nearly one-third—may already have enough equity to surpass the $250,000 cap, while around 8 million homeowners could exceed the $500,000 threshold. NAR forecasts that by 2035, nearly 70% of homeowners may see gains exceeding $250,000, with 38% exceeding $500,000. This trend is particularly pronounced in states with high real estate prices, such as California, Massachusetts, and Colorado.
NAR argues that the current capital gains tax caps discourage homeowners from selling their properties. Over the past 28 years, inflation has diminished the value of these exemptions, particularly affecting older homeowners who have lived in their homes for over 20 years. As many of these individuals contemplate downsizing or relocating to retirement homes, they face the possibility of significant tax liabilities that could hinder their ability to afford new homes.
Furthermore, an analysis by the Yale Budget Lab utilizing data from the Federal Reserve's 2022 Survey of Consumer Finances revealed that homeowners exceeding the exemption thresholds tend to be wealthier and older. In 2022, homeowners with gains above the capital gains exemption had an average net worth of $5.7 million, compared to just over $1 million for those below the exemption. This disparity highlights the broader implications of capital gains tax policies on various demographics within the housing market.
