New Data Backs CFE’s Push to Repeal the Homeowner Inflation Tax

Washington does not need another expensive housing program to see why buyers are struggling. Millions of homes already exist, but too many are being kept off the market by a tax code that has not kept up with reality.

New data from the National Association of REALTORS (NAR) confirms what the Center for a Free Economy has been warning for months. The federal capital gains exclusion for primary home sales is outdated, unindexed, and increasingly out of step with home prices. The result is a homeowner inflation tax that discourages long-time owners from selling, reduces housing turnover, and makes an already tight market harder for buyers to navigate.

The exclusion remains frozen at $250,000 for single filers and $500,000 for married couples, even though those limits were set in 1997. Since then, home prices have risen sharply while the tax thresholds stayed exactly where Congress left them.

As home values rise and the exclusion remains fixed, more ordinary homeowners face potential tax exposure when they sell. That growing gap now affects the existing-home market, where most families actually buy.

The Housing Market Needs Existing Homes

Housing affordability debates often focus on mortgage rates, new construction, and local zoning. Those all play a role, but the existing-home market carries most of the load.

NAR notes that roughly 85 percent of home sales involve existing homes, not newly built ones. When current homeowners do not sell, the market loses the homes that buyers are most likely to purchase. Families looking for a starter home, a larger home, or a home in a better location are left competing over fewer listings.

CFE has already called attention to this lock-in effect. A homeowner who bought decades ago may want to downsize, move closer to family, relocate for work, or sell a house that no longer fits. Current law can turn that ordinary life decision into a federal tax event.

That tax penalty weakens normal housing turnover. It keeps potential sellers on the sidelines and leaves buyers facing a thinner market.

The Lock-In Problem Is Already Here

The new NAR report puts numbers behind that warning. NAR estimates that 13.1 million homeowner households already have unrealized gains above the applicable exclusion threshold. That equals about 15 percent of all owner-occupied households nationwide.

These are not just luxury homeowners sitting on mansions in the most expensive zip codes. Many bought ordinary homes years ago, watched prices rise, and now face a tax code that treats inflation-driven appreciation like a windfall.

CFE has called this the homeowner inflation tax because that is exactly what it is. Washington froze the exclusion nearly three decades ago, then allowed inflation and rising home prices to push more families into potential tax exposure. Homeowners did not need to speculate or flip houses to get caught. They only needed to stay in their homes while prices rose around them.

That creates a powerful incentive to wait. For some families, the tax hit may be enough to delay a sale. For others, it adds one more reason to stay put in a home they would otherwise list.

Every delayed sale tightens supply for someone else.

A Frozen Threshold Gets Worse Every Year

The problem will grow as long as Congress leaves the thresholds untouched. NAR estimates that if home prices rise another 10 percent, about 17.5 million homeowners would have gains above the exclusion. A 20 percent increase would push that number to about 22.1 million. A 30 percent increase would expose about 27.2 million homeowners, or just over 30 percent of all homeowners.

No new vote is needed for that tax exposure to spread. No formal tax hike has to pass. The current system expands the problem automatically because the exclusion is not indexed to inflation.

Congress set fixed numbers in 1997 and left future homeowners to absorb the consequences. That policy failure grows more costly every year the thresholds remain frozen.

The effect is also spreading beyond the most expensive coastal markets. NAR points to fast-growing areas such as Boise and Nashville, where capital gains exposure can expand quickly as once-affordable markets experience sharp appreciation.

A tax problem that may have once seemed limited to a few high-cost regions is becoming a national housing supply problem.

Congress Already Has a Practical Fix

Congress does not need to create another subsidy or layer a new program on top of an already distorted housing market. It can remove a tax penalty that keeps homes from being listed.

H.R. 1340 and S. 3332, the “More Homes on the Market Act,” would double the home sale capital gains exclusion to $500,000 for single filers and $1 million for married couples. The bill would also index the exclusion to inflation going forward, which would prevent Congress from recreating the same problem a generation from now.

CFE has helped lead the push for this reform. A coalition letter signed by 40 conservative leaders and organizations urged congressional leaders to bring H.R. 1340 and S. 3332 up for a vote. The case was straightforward: the current tax code punishes long-time homeowners for selling and makes the housing shortage worse.

The new data strengthens that case. More homeowners are already affected than many policymakers may have realized, and the number will continue to grow unless Congress acts.

Voters Understand the Problem

The politics should not be difficult. CFE has pointed to national polling from the American Property Owners Alliance showing that 70 percent of voters oppose the current capital gains tax on home sales, while 82 percent support adjusting the tax to account for inflation. Support topped 80 percent among Democrats, Independents, and Republicans.

That level of agreement is rare. It reflects a basic sense of fairness. Families should not be punished by the IRS because they bought a home, stayed put, and watched inflation drive up nominal values over time.

Buyers need more homes on the market. Sellers need a tax code that does not penalize normal life changes. Congress has a bipartisan opportunity to fix both problems without spending more money.

CFE Takeaway

The new NAR report confirms what CFE has been saying: the outdated home sale capital gains exclusion is locking up the housing market.

Millions of homeowners already face potential tax exposure if they sell, and millions more will be pulled into the same trap if prices continue to rise. That keeps homes off the market, limits choices for buyers, and turns inflation into a tax penalty on long-time owners.

Congress should put H.R. 1340 and S. 3332, the “More Homes on the Market Act,” up for a vote. Updating the exclusion and indexing it to inflation would help unlock existing homes, restore fairness for sellers, and give buyers a better shot in a supply-constrained market.