How the Tax Code Is Locking Up the Housing Market

Center for a Free Economy President Ryan Ellis recently published an op-ed in National Review Online explaining how outdated federal tax rules are worsening the housing shortage and squeezing middle-class families out of homeownership.

High mortgage rates and elevated prices are only part of the problem. Federal tax policy is also reducing housing supply by discouraging homeowners from selling.

An outdated rule is freezing supply

Current law allows homeowners to exclude up to $250,000 in capital gains if single, or $500,000 if married, when selling a primary residence. Those limits were set in 1997 and have never been adjusted for inflation or rising home values.

After nearly three decades of appreciation, many middle-class homeowners now exceed those thresholds. As a result, selling a home can trigger a large tax bill even when gains reflect inflation rather than real increases in purchasing power.

That creates a lock-in effect. Homeowners delay downsizing, avoid moving for work, or stay in homes that no longer fit their families. Each delayed sale keeps one more home off the market, tightening supply for younger buyers.

A simple fix already exists

The op-ed highlights H.R. 1340, the More Homes on the Market Act, which would:

• Double the capital gains exclusion to $500,000 for single filers and $1 million for married couples

• Index the exclusion to inflation going forward

  
  

This approach does not subsidize demand or impose new regulations. It removes a federal tax penalty that discourages normal housing turnover.

This is a nationwide, middle-class problem

Rapid home-price appreciation is no longer confined to coastal cities. States such as Tennessee, Texas, Florida, Utah, and the Carolinas have seen strong price growth as families relocate for opportunity and affordability.

In these markets, long-time homeowners can now exceed the federal exclusion just as easily as households in historically expensive regions. When more owners are locked in place, inventory shrinks and prices remain elevated.

Why it matters

Without reform, housing supply will remain constrained and affordability pressures will intensify. First-time buyers will face fewer listings. Families seeking to move up will struggle. Reduced mobility will weaken labor markets and slow community growth.

Updating the capital gains exclusion is a modest, targeted reform that aligns the tax code with today’s housing market and helps unlock supply without new spending or bureaucracy.