In recent discussions around America’s deepening housing crisis, a familiar proposal has reemerged: slashing or eliminating capital gains tax on home sales. Championed recently by former President Donald Trump and supported by groups like the National Association of Realtors (NAR), this idea is pitched as a way to unlock housing supply by encouraging more homeowners to sell.
However, while the prospect of a tax break may sound appealing, experts and economists widely agree that such a move would do little to address the root causes of the housing affordability crisis. In fact, it may even exacerbate existing inequities in the market.
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Understanding the Capital Gains Tax on Home Sales
Currently, the federal capital gains tax applies to the profit made on the sale of an asset, including real estate. However, the U.S. tax code provides a significant exemption for primary residences: homeowners can exclude up to $250,000 in gains ($500,000 for married couples) if they have lived in the home for at least two of the past five years. This exemption has remained unchanged since it was introduced in 1997.
Given the significant appreciation in home values over the past three decades, particularly in coastal and high-growth urban areas, more homeowners are finding themselves over that exemption threshold. According to the NAR, roughly 15% of current homeowners would face capital gains taxes if they sold their homes in today’s market. This has led to calls for reform, including raising or eliminating the exemption limits.
The Argument: A Tax Cut Will Increase Inventory
Proponents of slashing the capital gains tax argue that it would incentivize long-term homeowners, especially older Americans looking to downsize, to sell their properties. This influx of listings, they claim, could help relieve the pressure on the market by increasing housing supply, thereby easing prices and helping more first-time buyers enter the market.
Lawrence Yun, the NAR’s chief economist, recently stated that many homeowners are deterred from selling because of the capital gains tax. “Their accountants are saying don’t sell the home because of the tax,” Yun explained. He argues that lifting the exemption could lead to a surge in home listings, particularly from retirees and empty nesters who are sitting on significant equity but are reluctant to move.
The Reality: Limited Impact on Housing Supply
While tax considerations may influence some homeowners’ decisions, the broader economic context suggests that a capital gains tax cut would have a limited impact on overall housing supply. For one, the majority of homeowners still fall below the existing exemption thresholds. With the median home price in the U.S. at $435,300 (as of June 2025), most sellers would not face a capital gains tax liability.
Moreover, homes that would be unlocked by such a policy change are often in the higher-end market segment. According to NAR data, only 17% of homes sold in June 2025 were priced above $750,000. These are not the types of homes that are in most demand among first-time buyers and middle-income families.
Structural Problems Require Structural Solutions
The housing crisis in America is fundamentally a problem of supply and affordability. There are simply not enough homes being built, particularly in the affordable and entry-level segments. Decades of underbuilding, restrictive zoning laws, rising construction costs, and labor shortages have all contributed to a shortfall of millions of housing units nationwide.
Cutting capital gains taxes does nothing to address these issues. It doesn’t lower the cost of building materials, speed up permitting processes, or make it easier to construct multi-family housing in exclusionary suburbs. In fact, by disproportionately benefiting wealthier homeowners and investors, such a policy could widen the gap between those who already own homes and those struggling to buy their first.
A Windfall for the Wealthy?
Another concern is that slashing capital gains taxes on home sales could act as a windfall for high-income individuals and real estate investors. Unlike first-time buyers or renters, these individuals already have substantial equity and stand to benefit the most from a tax break. This could potentially inflate prices further in desirable markets as capital is reinvested into more property, driving speculation.
Moreover, there’s little evidence to suggest that such a policy would lead to a significant increase in housing transactions. Many homeowners stay put due to lifestyle preferences, proximity to family, or concerns about the cost of buying another home in today’s high-priced market. Tax implications are just one piece of a much larger puzzle.
Experts Weigh In
Housing economists and policy analysts are largely skeptical that capital gains tax reform alone would make a meaningful dent in the housing crisis. Jenny Schuetz, a senior fellow at the Brookings Institution, notes that “targeted supply-side solutions” are far more effective.
“We need to build more housing in places where people want to live and work,” she says, “and that means reforming zoning, incentivizing affordable development, and expanding infrastructure.”
Urban economist Richard Green from the University of Southern California echoes this sentiment. “If the idea is to help younger people get into homes, giving a tax break to older, wealthier homeowners doesn’t really do the job,” he said in a recent panel. “It just shifts money around.”
Better Alternatives to Address the Crisis
Rather than focusing on capital gains tax cuts, many experts advocate for a multifaceted approach to housing reform:
- Zoning Reform: Encourage states and municipalities to update zoning codes to allow for more high-density and multi-family housing, especially near transit hubs.
- Subsidies for Affordable Housing: Increase federal and state funding for affordable housing development, including low-income housing tax credits and grants to non-profit developers.
- Incentives for First-Time Buyers: Expand programs that provide down payment assistance, mortgage rate subsidies, and financial literacy education to first-time and low-income buyers.
- Streamlined Permitting: Simplify and accelerate the permitting process to reduce delays and uncertainty in new housing developments.
- Public-Private Partnerships: Leverage collaborations between government and private developers to build mixed-income housing and invest in underserved communities.
Political and Fiscal Implications
There’s also the question of cost. Capital gains tax revenues contribute to federal funding that supports everything from infrastructure to social programs. Eliminating or reducing this tax could blow a hole in the federal budget at a time when the government is already grappling with high deficits and competing spending priorities.
Additionally, tax reform proposals often face partisan hurdles. While Republicans generally support tax cuts as a means of stimulating economic activity, Democrats tend to emphasize progressive taxation and social investment. Any attempt to significantly alter the capital gains tax exemption would likely face an uphill battle in Congress.
Frequently Asked Question
What is the capital gains tax on home sales?
The capital gains tax applies to the profit earned when selling an asset, such as a home. For primary residences, the IRS allows exclusions of up to $250,000 for individuals and $500,000 for married couples if they’ve lived in the home for two of the last five years.
Why are some proposing to cut or eliminate this tax?
Advocates, including the National Association of Realtors and former President Trump, argue that reducing or removing the capital gains tax would incentivize more homeowners—especially retirees—to sell, potentially increasing housing inventory.
Would cutting the capital gains tax actually solve the housing crisis?
No. Most experts agree that while it might nudge some high-equity homeowners to sell, it would not meaningfully address the core issue: a national shortage of affordable and entry-level homes.
Who would benefit the most from a capital gains tax cut?
Wealthier homeowners and real estate investors with significant equity stand to benefit the most. Many middle-income homeowners are already below the current exemption thresholds and would see little to no impact.
How could such a tax cut worsen housing inequality?
Reducing the capital gains tax might encourage speculative real estate investment and widen the wealth gap, further concentrating homeownership advantages among higher-income households.
What are more effective alternatives to fix the housing market?
Solutions include zoning reform to enable more construction, increasing funding for affordable housing, streamlining permitting processes, and expanding support for first-time buyers.
What’s the risk of focusing on tax cuts instead of structural reforms?
It could distract policymakers from implementing meaningful, long-term solutions. Focusing on tax cuts alone doesn’t address the fundamental barriers to housing affordability, such as underbuilding and regulatory hurdles.
Conclusion
At its core, the proposal to slash capital gains taxes on home sales is a distraction from the real, structural challenges facing America’s housing market. While it may offer modest benefits to a narrow group of sellers, it falls short of addressing the broader issues of affordability, supply constraints, and systemic inequality. Solving the housing crisis requires bold, comprehensive action that tackles the root causes head-on. That means building more homes, reforming outdated zoning laws, supporting affordable housing initiatives, and helping first-time buyers gain a foothold in the market. Tax cuts for wealthy homeowners, however politically popular they may seem, simply aren’t the answer.
