For decades, the continuous rise in housing prices in the United States has put millions of homeowners in high-priced areas at risk of facing capital gains taxes of up to hundreds of thousands of dollars when selling their primary residences. A recent report indicates that this risk is expanding to a broader market, especially in regions experiencing rapid population growth and rising home prices.
Real estate professionals and analysts warn that this could lead many homeowners to postpone selling their homes, further exacerbating the nationwide housing shortage and worsening the increasingly severe housing affordability issue. They point out that one of the factors contributing to this problem is a capital gains tax exemption regulation that has been in place for nearly 30 years.
Federal lawmakers are pushing for a bipartisan bill to expand the tax exemption amount, with some hoping for the bill to pass this year.
Under the Taxpayer Relief Act of 1997, individuals selling their primary residences can enjoy a tax-free capital gains exemption of $250,000, while married couples can enjoy an exemption of $500,000.
Meanwhile, housing prices in the U.S. have seen a significant increase. According to data from the National Association of Realtors (NAR), the median home price in the U.S. has risen from $129,000 in 1997 to $417,700 by the end of April this year, more than doubling. In some high-priced markets, the median home prices now exceed $1 million.
An analysis released by NAR on May 18 found that about 13.1 million U.S. homeowners, approximately 15% of owner-occupied households, hold unrealized capital gains exceeding the current tax exemption limit.
At the state level, approximately 51.3% of homeowners in Hawaii hold unrealized capital gains exceeding $250,000, followed by California at 43.6%, Washington D.C. at 36.2%, Massachusetts at 33.1%, and Washington state at 29.9%. The report notes that in some cities in these high-priced states, including San Jose, San Diego, and Honolulu, the majority of owner-occupied households exceed the tax exemption threshold, with San Jose reaching 63%.
The report highlights that in states where housing prices have rapidly increased over the past decade, particularly those with significant price increases before the 2000s and after 2012, the proportion of homeowners nearing the capital gains tax exemption threshold is rapidly rising. These states include Idaho, Utah, Arizona, and Nevada.
The report specifically cites Boise, Idaho, and Nashville, Tennessee, metropolitan areas with a large number of homeowners who purchased properties just before significant price increases. The percentage of households in these areas holding unrealized capital gains exceeding the tax exemption threshold is 21.5% and 17.9%, respectively.
“This underscores an important issue: the risk of capital gains tax not only depends on how high home prices are now but also on when homeowners purchased their homes,” the report notes.
According to NAR data, in the first quarter of this year, there were five metropolitan areas where the median home prices exceeded $1 million, with the San Jose-Sunnyvale-Santa Clara area leading at $2.03 million. The median home prices in Boise and Nashville were $484,000 and $405,100, respectively.
The report mentions that adjusting for inflation, the purchasing power of the tax exemptions since the Taxpayer Relief Act was passed has halved. This means that a $250,000 tax exemption in 1997 corresponds to approximately $124,650 in today’s purchasing power, while a $500,000 exemption corresponds to $249,290.
Nadia Evangelou, NAR economist, told Epoch Times, “The biggest misconception is that this only concerns luxury homes; in reality, these are ordinary homes that people bought years ago and have significantly appreciated over time. This is definitely a problem, more widespread than many people realize.”
Evangelou noted that since capital gains are realized when selling a home, homeowners concerned about triggering a significant tax burden may choose to “wait it out.”
Anne Russell, a homeowner in Los Angeles and real estate agent at Rodeo Realty, told Epoch Times that she would not forgo the money she could have made in the deal.
Russell has lived in a 3,000 square foot, five-bedroom home for nearly 40 years. She purchased it for $350,000 in 1988 and has since conducted multiple renovations and a major expansion. She estimates the current market value of the home to be around $2.8 million.
Now that her children are grown and have moved out, Russell wants to sell the property. However, she says she is “trapped” by a federal capital gains tax law enacted nearly 30 years ago, as the law would subject her to nearly 15% in capital gains tax. Additionally, California imposes a 13.30% income tax.
“Even after deducting all the significant expenses I’ve made on this home over the years, I would still have to pay hundreds of thousands of dollars in capital gains tax. This won’t make Californians or others in similar situations move out of their homes,” Russell said.
Ken DeLeon, founder of DeLeon Realty, previously told Epoch Times, “This antiquated capital gains tax law has created a housing shortage.”
“Many older people who have lived in their homes for 30 years or more want to sell, but now their home values have tripled or quadrupled. Some sellers today may face over $1 million in capital gains tax,” he added.
Evangelou explained that since about 85% of home sales involve existing housing, facilitating the turnover of existing housing is the fastest way to increase housing inventory. However, she stated that the current capital gains tax laws are hindering this process.
Jonathan Miller, market analyst and director of StreetMatrix in New York City, told Epoch Times that the financial burden brought by capital gains tax is likely a major reason deterring homeowners from listing their properties for sale.
“The inventory is decreasing, and this has a greater impact on the upward pressure on prices for existing homes in the market,” he said. “The more supply, the more likely the prices will start to stabilize.”
Miller pointed out that in the northeastern U.S., where housing supply is limited, bidding wars remain common, with about one out of every four homes selling at prices above the asking price.
Kimberly Schmidt, a real estate agent at Compass in San Diego, told Epoch Times that the outdated cap on the capital gains tax exemption limit is significantly affecting the housing supply in Southern California.
She mentioned that San Diego is one of the tightest housing markets in the U.S. with high prices and is in urgent need of increased housing inventory.
Schmidt stated that the median selling price of single-family homes in San Diego County is $1.1 million, with even higher prices in coastal areas, leading sellers to potentially face substantial capital gains taxes. Therefore, they often choose to hold onto their homes, resulting in fewer homes being listed for sale.
Miller noted that the role of new housing in increasing inventory is limited, as in most U.S. real estate markets, new homes account for only about 10% of total housing inventory.
Bipartisan federal lawmakers have introduced legislation to address this issue.
The “More Homes on the Market Act,” initially proposed in 2022 by Democratic California Representative Jimmy Panetta and Republican Pennsylvania Representative Mike Kelly, seeks to amend the tax laws to raise the capital gains tax exemption amount for selling primary residences to $500,000 for individuals and $1 million for married couples.
Panetta remains hopeful that Congress will pass the bill this year.
He told Epoch Times, “One avenue for us to push this bill through is by attaching it to the next possible tax package. Affordable housing is a top concern for my constituents, and I will continue to advocate for federal solutions to increase housing supply and reduce housing costs.”
Panetta stated in a release that the current capital gains tax exemption thresholds for selling homes are “outdated” and that these nearly 30-year-old tax thresholds “stifle our real estate market and lead to a shortage of housing supply.”
Kelly added in the statement that individuals who have made improvements and investments in their homes over the years are being unfairly penalized by the “significant tax burden.”
The bill has garnered support from 121 bipartisan lawmakers, including 22 from California.
New York Republican State Representative Mike Lawler expressed confidence in the “More Homes on the Market Act” passing this year.
As a key supporter of the legislation, Lawler told Epoch Times that updating the current tax laws would make it easier for long-term homeowners to sell their homes, helping more homes enter the market.
“This is a simple, common-sense way to alleviate the housing shortage, provide fair opportunities for young families to purchase homes, and allow older individuals to preserve more of their hard-earned money for retirement and long-term care,” he said.
Panetta stated that he will continue to work with colleagues from both parties to advance this legislation. The bill has also received support from 40 national organizations.
Another similar bill, the “Capital Gains Inflation Relief Act,” was introduced by Republican Texas Senator Ted Cruz in February 2025 and was subsequently referred to the Senate Finance Committee, where it currently remains. ◇