Some 8 million American homeowners are sitting on gains large enough to exceed the federal capital gains exclusion if they sold today, according to a report published this month by the Niskanen Center. Another 29 million homeowners would top the $250,000 threshold for single filers. The analysis argues that outdated tax rules on home sales and inheritance are locking families out of single-family housing markets across the country.
Congress set the capital gains exclusion for primary residences at $250,000 for single filers and $500,000 for married couples in 1997, when the median home sold for $145,000. The thresholds haven't been adjusted since, not even for inflation. In the early 2000s, fewer than 40,000 home sales per year generated gains exceeding the $500,000 joint exclusion, roughly 1.3 percent of all existing home transactions. By 2022, that number surpassed 230,000, or 8 percent of all sales. In California, more than one in four existing home sales now generate gains above the $500,000 threshold. If the exclusion had been indexed to inflation since 1997, it would be over $500,000 for single filers and $1 million for joint filers in 2026. The National Association of Realtors estimates that 10 percent of all homeowners would exceed the married joint filer exclusion, while 34 percent of the total would top the single-filer cap.
The report identifies a second tax provision that worsens the problem: stepped-up basis rules for inherited property. Under current law, when a homeowner dies, the tax basis of their estate resets to current market value, erasing all appreciation from the tax ledger. For example, an elderly widow in San Francisco who owns a home that's gained $500,000 in value would owe capital gains taxes on $250,000 after exhausting her exclusion. But if she passes the house to her children, they'll be taxed only on gains from the date they took ownership, which would be minimal if they sell quickly. The authors write that this rule encourages homeowners with significant appreciation to hold properties for life as a tax mitigation strategy, keeping family-sized homes off the market.
The mechanism works like this: a looming tax bill discourages homeowners who might otherwise consider selling, while the promise of a tax-free windfall for heirs makes holding property until death the rational financial decision. State-level property tax caps reinforce the incentive to stay put, particularly in places like California where longtime homeowners can be locked into assessments substantially below current values. According to the Budget Lab at Yale, cited in the report, doubling the capital gains exclusion would cost the federal government $76 billion in lost tax revenue over 10 years. But applying carryover basis rules to inherited residential real estate would reduce lost revenue by $40 billion over the same period, offsetting more than half the cost. The Congressional Budget Office estimates that nearly two-thirds of the stepped-up basis benefit goes to the top income quintile, with more than one-fifth going to the top 1 percent.
The report recommends enacting both reforms simultaneously: doubling the exclusion to make it easier to sell long-held homes with significant appreciation, and switching to carryover basis to remove the incentive to hold real estate until death. The bipartisan More Homes on the Market Act, introduced by Rep. Jimmy Panetta and backed by more than 145 co-sponsors, would raise the exclusion to $500,000 for single filers and $1 million for married couples, then index both figures to inflation. The authors argue that together, the two policies would reduce federal tax incentives that encourage wealthy homeowners to sit on large, underoccupied homes rather than sell them to growing families, at a net fiscal cost the government can afford.