Nearly 30-Year-Old Capital Gains Tax Exemption Rules Blamed For US Housing Shortage

Authored by Mary Prenon via The Epoch Times (emphasis ours),

With median home prices exceeding $1 million in many U.S. housing markets, some real estate professionals are drawing attention to a 28-year-old capital gains tax law, citing it as one factor contributing to the nationwide housing shortage.

A recent report from Realtor.com shows that California is home to 8 of the 10 most expensive housing markets in the United States. San Jose tops the list with a median sales price of $2.02 million, followed by Anaheim and San Francisco at $1.45 million and $1.32 million, respectively.

Ken DeLeon, founder of DeLeon Realty in Palo Alto, told The Epoch Times that some communities in the San Francisco Bay Area have experienced skyrocketing home prices, which have jumped 667 percent on average since 1997—the year the Taxpayer Relief Act was signed into law, allowing married homeowners to exclude up to $500,000 in capital gains from the sale of their primary residence, and $250,000 for single homeowners.

“This outdated capital gains law has resulted in an artificially-created housing shortage,” DeLeon said. “A lot of older people who have lived in their homes for 30 years or more want to sell, but the value of those homes has tripled or quadrupled now. Some of these sellers could now be facing capital gains taxes of over $1 million.”

According to a HUD report, the median cost of a single-family home in 1997 was $143,000, compared with $414,000 in April 2025, as reported by the National Association of Realtors.

With the combined federal and state capital gains tax rate now at 37.1 percent in California, potential sellers seeking to avoid elevated tax exposure are choosing instead to remain in their current properties.

As a result, DeLeon said inventory levels have reached historic lows and sellers are stuck in a tax trap.

“We’ve seen more than 57 percent drop in inventory in the Silicon Valley, which means a lot of single people and young families are also stuck in expensive rentals,” he said.

With properties typically listed at $2 million to $5 million in the region, primarily it’s employees from high-paying tech companies such as Apple, Google, Adobe, and Oracle who can afford them, DeLeon said.

“People do want to buy, but listings are scarce. And the housing shortage is driving prices even higher,” he said.

DeLeon contends that the economic ripple effects of the almost three-decade-old tax formula is causing not only fewer home sales, but less revenue from transfer taxes, reset property taxes, and local economic activity.

California is not alone in facing this capital gains crisis. Bianca D’Alessio, a broker with Nest Seekers International in New York City, is seeing a similar situation with her clients, particularly owners of brownstones in the borough of Brooklyn.

“We have older people who may have bought their home 30 years ago for less than $100,000 and now they’re worth $4 million,” she told The Epoch Times. “They may want to downsize and move, but they can’t afford to pay all those capital gains taxes.”

D’Alessio explained that while these homeowners will still walk away with a significant profit, they’ll probably want to pay cash for their next home, which could often be a condo with hefty monthly maintenance charges.

“While they’ll still enjoy the profits of their sale, that huge chunk of money going towards capital gains is cutting into their nest eggs for their futures,” she said.

Unlike California’s Silicon Valley, there has been an uptick in inventory in Manhattan, with a wealth of recent new construction. “There are a lot of opportunities for buyers now, and sellers are definitely negotiating more,” D’Alessio said.

However, existing home sellers and those who want to purchase turn-of-the-century classics are still stuck in a holding pattern, she said.

“The bottom line is that sellers know how much their house is worth, yet when they see the amount of capital gains taxes they have to pay, it’s frustrating for them to see how much less they’re actually going to receive.”

Congressional Action

A bipartisan effort to resolve the issue is already underway in Congress. Reps. Jimmy Panetta (D-Calif.) and Mike Kelly (R-Pa.), along with many others, in February reintroduced the More Homes on the Market Act to make housing more available and affordable for Americans.

The legislation would update the tax code by doubling the exclusion of capital gains from the sale of a principal residence. For single sellers, the exemption would move to $500,000 and for couples, to $1 million. The bill is designed to incentivize homeowners to sell their properties, thereby increasing the supply of housing and helping to alleviate affordability challenges across the country.

“If this bill is not passed, the declines in housing inventory, along with the consequences of greater housing costs and increased homelessness, will only get worse,” DeLeon noted.

“Electing to deny this bill will push America further into a housing market where only large, wealthy corporations can purchase the increasingly rare single-family home.”

The National Association of Realtors (NAR) is advocating for the passage of the bill. In a just-released white paper, NAR indicated that “homeowners are facing a looming tax penalty simply for staying in their homes too long.”

Noting that the capital gains exclusion hasn’t been updated for inflation for 28 years, NAR called the thresholds “outdated” and said it was “distorting the housing market.”

A recent NAR study quoted in the white paper indicates that 34 percent of homeowners today (29 million) could already exceed the $250,000 capital gains exclusion cap for single filers. More than 10 percent (8 million) have potential gains above the $500,000 threshold for couples filing jointly. The study also predicts that by 2030, 56 percent of homeowners, or 47 million, are projected to potentially exceed the $250,000 threshold, and nearly 23 percent (20 million) could surpass $500,000.

“At a time when many of these homeowners are considering downsizing or moving to a retirement facility, more and more are facing gains well in excess of the exclusions, which can leave them owing many thousands of dollars in taxes and reduce their ability to afford a new home,” the study states.

DeLeon also noted that seniors often rely on their home investment to sustain them throughout their lives as a supplement to their social security checks.

“However, many may now find themselves near poverty and cash-poor when high taxes prevent them from selling their homes,” he said.

He is encouraging everyone nationwide to contact their congressional representatives to push for passage of the More Homes on the Market Act.

“Let us enact a policy that will make home ownership easier for everyone and allow the societal benefits of greater home ownership to become a reality again,” DeLeon said.