Republicans Propose Cutting Capital Gains Taxes on Home Sales to Boost the Housing Market

Key Takeaways

• Republican lawmakers are urging the Department of Treasury to index capital gains to inflation.
• Indexing capital gains to inflation could reduce taxable gains for long-term homeowners.
• Current tax rules allow eligible homeowners to exclude up to $250,000 of capital gains from their income.

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Republican lawmakers are proposing a big change to how capital gains are calculated when people sell their homes.

In a recent letter penned to Treasury Secretary Scott Bessent, eight Republican members of Congress—some of whom are members of the Real Estate Caucus—asked Bessent to use “executive authority” to index capital gains to inflation. According to a CNBC report, Republican Senators Ted Cruz (R-TX) and Tim Scott (R-SC) sent a similar letter to Bessent this month.

What This Means For You

Reducing taxable gains for long-term homeowners could encourage more people to sell, particularly higher-income households. But because most homeowners qualify for the existing capital gains exclusion, the broader impact on housing affordability and overall economic growth may be limited.

“Families who purchase a home or small real estate investment often hold that asset for many years or decades. Over long holding periods, a substantial share of the nominal gain may reflect inflation rather than true increases in real value,” wrote the lawmakers. “Taxing these phantom gains can discourage housing mobility, lock up housing supply, penalize long-term homeowners, and distort real estate investment decisions.”

Currently, homeowners may be eligible to exclude up to $250,000 (or up to $500,000 if they file a joint return with a spouse) worth of capital gains from their income when they sell their primary residence. That means that if a homeowner has a realized gain of more than $250,000, the amount above that limit would be subject to capital gains tax.

Related Education

Reducing or Avoiding Capital Gains Tax on Home Sales

Capital Gains Tax: What It Is, How It Works, and Current Rates

However, by indexing capital gains to inflation, homeowners might have a lower realized gain.

“What many homeowners don’t realize is that their home is also considered a ‘capital asset’ in the eyes of the IRS,” wrote Shane Tenny, a managing partner at Spaugh Dameron Tenny, in an email. “Fortunately, most homeowners are protected by a generous tax rule, which allows many sellers to avoid paying taxes on a large portion of the gain. But with the rapid rise in home prices over the past decade, we’re increasingly seeing homeowners who are surprised to learn that they may actually owe taxes when selling.”

Under the current rules, a home purchased for $100,000 in 2005 and sold two decades later for $400,000 would result in a $300,000 capital gain. While $250,000 of that could be excluded from one’s income, an individual would pay capital gains tax on $50,000.

Yet if gains were indexed to inflation, that $100,000 home would be worth $166,582 in 2025 dollars, assuming no growth. If the home sold for $400,000, that would be a $233,418 gain, all of which could be excluded from one’s income.

According to an analysis by think tank Brookings Institution, this policy would not affect most homeowners except the wealthiest. Under current law, the vast majority of homeowners (95%) would not owe capital gains tax on a home sale.

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