(NewsNation) — President Donald Trump says he’s open to scrapping the capital gains tax on home sales — a move that would save some sellers a significant amount of money when they cash out.
“We are thinking about no tax on capital gains on houses,” Trump told reporters in the Oval Office last month.
Right now, when you sell a home, the profit could be subject to federal capital gains tax — just like other investments — though there are major exemptions for people selling their main home.
Trump’s comments came after Rep. Marjorie Taylor Greene, a Georgia Republican, introduced legislation aimed at eliminating the capital gains tax on the sale of primary homes.
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“Families who work hard, build equity, and sell their homes should not be punished with massive tax bills,” Greene said in a release announcing the “No Tax on Home Sales Act.”
For sellers who benefit, the tax savings would average about $100,000, according to an analysis by Yale University’s Budget Lab. However, the study found that those savings would apply only to a “small fraction” of homeowners, with wealthier, higher-income and older homeowners standing to gain the most.
When broken down by region, California homeowners — along with sellers in other pricey coastal states — emerge as the biggest potential winners, according to a separate report from Redfin.
Here’s what to know about the capital gains tax on home sales and what eliminating it would mean.
How do capital gains on home sales work today?
Selling your home for more than you paid can feel great, but if your profit exceeds a certain amount, you might owe the IRS.
Under current tax rules, homeowners selling their primary residence can exclude up to $250,000 (or $500,000 if married filing jointly) in gains from their taxable income. Any profit above those limits is generally taxed at standard capital gains rates.
For example, a married couple who bought a home for $300,000 and later sold it for $1 million could owe capital gains tax on $200,000 of their profit.
By contrast, a couple who bought their primary home for $300,000 and sold it for $600,000 after living there for at least two years likely wouldn’t owe capital gains tax.
The specific tax rate depends on how long the couple owned the home, and their income, but the main takeaway is this: A full exemption, as Trump has floated, would largely benefit sellers with profits above today’s thresholds.
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But supporters of Greene’s bill argue that the tax is no longer limited to the wealthy, citing rising home prices that have pushed more sellers into capital gains territory.
According to the National Association of Realtors, nearly 34% of current homeowners — about 29 million people — could already exceed the $250,000 capital gains exclusion cap for single filers. About 10%, or 8 million homeowners, have potential gains above the $500,000 threshold for married couples.
NAR expects both those percentages to rise by 2030.
Shannon McGahn, NAR’s executive vice president and chief advocacy officer, warned in a recent report that a “capital gains cliff” is looming for the middle class, fueled in part by a reluctance to sell that has driven up home prices.
“We welcome any serious proposal that addresses the outdated capital gains thresholds hurting American homeowners. This is no longer just a concern for higher-end properties,” McGahn said in a statement.
One of the main concerns is that the current capital gains exclusion limits, set in 1997, haven’t moved up with inflation, even as the median home price has nearly tripled since then, NAR said.
If you adjust for inflation, a $500,000 exemption in 1997 would be worth more than $1 million today.
Who would benefit?
The nation’s housing supply could get a much-needed boost if eliminating capital gains taxes prompts more people to sell their homes.
Redfin data shows that empty-nest baby boomers own 28% of the nation’s large homes — twice the share held by millennials with kids. One reason is that there’s been little financial incentive for them to downsize.
“A lot of baby boomers say they never plan to sell their homes — but that mindset could shift if capital gains are taken off the table,” Redfin Chief Economist Daryl Fairweather said in a new analysis.
The online brokerage found that about 1 in 4 (25.9%) U.S. homes have gained at least $250,000 in value since their last sale, while 8% have gained more than $500,000 — but the figures vary widely by state.
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Roughly 60% of homes in California, Hawaii and Massachusetts have gained $250,000 in value since they were purchased, compared with about 2% in states like Iowa, North Dakota and Mississippi, Redfin determined.
“It would disproportionately benefit wealthier homeowners from coastal states like California. Some states, especially in the South and Midwest, would see far less impact,” Fairweather noted.
Yale’s Budget Lab analysis found that in 2022, homeowners with capital gains above the current exemption thresholds had an average net worth of $5.7 million.
Could it solve the affordable housing shortage?
Eliminating the capital gains tax could help spur the so-called “silver tsunami” — a wave of older homeowners downsizing — but it may not free up the kinds of homes many buyers are seeking.
“It’s important to note that these homes are not starter homes; they are more likely to be million-dollar homes that are out of reach for most homebuyers,” Fairweather pointed out.
Another possibility is that more older adults downsizing could increase competition for starter homes if new construction doesn’t keep pace, potentially pushing prices higher and making entry-level housing even harder to find.
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And compared to other hurdles, like elevated mortgage rates and soaring home prices, getting rid of capital gains taxes may not be enough to significantly boost turnover in the housing market.
Redfin’s analysis found that the typical U.S. home has gained $144,543 in value since it was last purchased, meaning owners would not owe any capital gains tax if they sold it today.
Still, the incentive varies widely across markets.
In pricey California cities like Anaheim, San Jose, San Diego and Los Angeles, more than 80% of homes have gained at least $250,000 in value, Redfin said. Meanwhile, in Detroit, Philadelphia and Indianapolis, fewer than 10% of homes have seen that kind of appreciation.
There would also be revenue implications for the federal government.
Over the past two decades, receipts from capital gains averaged about 9% of individual income tax revenues per year, totaling $137 billion, according to the Peter G. Peterson Foundation. Real property accounted for about 9% of the value of capital gains reported to the IRS in 2015 — a smaller share than gains from pass-through entities (51%), corporate stock (18%) and mutual funds (11%).
