A Nearly 30-Year Old Tax rule Could Be Keeping Homes Off the Market

There’s a housing proposal working its way through Congress that hasn’t gotten nearly as much attention as mortgage rates or home prices, but it could have a real impact on homeowners, especially those who have owned their homes for a long time.

It’s called the More Homes on the Market Act, and the idea behind it is pretty simple: update a capital gains tax rule that hasn’t changed since 1997.

The $500,000 Exclusion Isn't What It Used to Be

Under current federal law, when you sell your primary residence, you can generally exclude up to $250,000 of your gain from federal capital gains taxes if you’re single, or up to $500,000 if you’re married filing jointly, assuming you meet the requirements for the exclusion.

Those numbers probably sound fairly generous until you realize they were established nearly 30 years ago.

Think about how much home values have changed since 1997, particularly in markets like Maryland and Northern Virginia. Someone who bought a home decades ago for $200,000 or $250,000 could easily be sitting on a property worth several times that amount today.

That appreciation is obviously a good thing. Homeownership has helped that person build substantial equity. But when it comes time to sell, some longtime homeowners are discovering that a portion of that gain may extend beyond the current exclusion.

And that can affect the decision to move.

What Congress Is Considering

The bipartisan More Homes on the Market Act would double the current capital gains exclusions to $500,000 for individuals and $1 million for married couples filing jointly. The legislation would also provide for inflation adjustments going forward, rather than allowing the thresholds to remain frozen for another few decades.

This isn't a small issue affecting only a handful of extremely expensive homes.

The National Association of Realtors estimates that roughly 13.1 million homeowners, about 15% of owner-occupied households, could exceed the current capital gains exclusion if they sold their primary residence.

That's where this becomes more than a tax story. It becomes a housing inventory story.

Why This Could Put More Homes on the Market

Imagine someone who bought their home 25 or 30 years ago. The kids are grown, they don't need as much space anymore, and they'd actually prefer to downsize.

Financially, though, selling may not be as simple as it sounds. Their home has appreciated significantly, and depending on their individual circumstances, selling could result in a substantial taxable gain.

So maybe they wait.

From that homeowner's perspective, that decision may make perfect sense. But multiply it across millions of homeowners and you start to see the effect on the housing market.

One longtime homeowner decides not to sell, which means one fewer home available for the family looking to move up. That family stays in its current home, which means that home doesn't become available to another buyer. Housing inventory depends on people being able to move through different stages of homeownership.

Building more homes is obviously an important part of addressing housing supply. But sometimes increasing inventory also means removing obstacles that keep existing homes from coming onto the market.

This Hasn't Passed Yet

The important thing to understand is that this is still proposed legislation. Homeowners shouldn't make a financial or real estate decision today assuming these new exclusions will become law. But it is worth watching.

The More Homes on the Market Act has bipartisan support, and the National Association of Realtors has been actively advocating for the change. If enacted, it would represent the first major update to these exclusion limits in nearly three decades. For longtime homeowners who have accumulated significant equity, that could make a meaningful difference when deciding whether to sell.

And for everyone else trying to buy a home, it could matter too. Anything that removes a legitimate barrier keeping homeowners from selling has the potential to bring additional inventory onto the market.

If you've owned your home for a long time and you're considering selling, it's worth understanding how much your property has appreciated and what that could mean for you. The tax side is a conversation to have with a qualified tax professional, but knowing what your home is worth today is a good place to start.