Congress Holds the Key to Unlocking America’s Housing Market: Capital Gains

The United States faces a housing shortage of over 4 million homes, according to the U.S. Chamber of Commerce and supported by the analysis of several major financial institutions including JP Morgan Chase and Goldman Sachs. Demand remains strong, but inventory remains constrained. While zoning reform, permitting modernization, workforce development, and incentives for homebuilding are being addressed, policymakers must also confront a less-discussed reality: how federal tax policy can be used to encourage long-term homeowners to sell their homes and create opportunity now.

The capital gains exclusion on the sale of a primary residence—$250,000 for individuals and $500,000 for married couples—was established in 1997. Since then, home values have risen dramatically across much of the country. Yet the exclusion has never been adjusted for inflation.

As a result, many long-time homeowners face a significant tax liability if they sell. For some, the prospect of a large capital gains tax bill creates a powerful incentive to remain in homes that no longer fit their needs. Empty nesters stay in large family homes. Retirees delay downsizing. Homeowners postpone moves closer to family, healthcare, or employment opportunities.

The consequences extend far beyond individual households. Every home that remains off the market is one less opportunity for a first-time buyer, a growing family, or a worker relocating for a job. In a market already suffering from limited inventory, tax-induced “lock-in” effects reduce mobility and exacerbate affordability challenges.

Congress has an opportunity to address this problem through the bipartisan More Homes on the Market Act. The legislation would increase the capital gains exclusion to account for price growth over the last 30 years and allow it to grow with inflation going forward. While not a comprehensive housing solution, it represents a meaningful step toward removing barriers that keep existing housing inventory frozen in place.

Critics may argue that capital gains reform primarily benefits higher-income homeowners. But the broader economic impact deserves equal consideration. Increasing housing turnover can help improve inventory levels, create opportunities for first-time buyers, and allow long-time owners to transition into housing that better meets their needs. Greater mobility also supports local labor markets, economic growth, and community development.

Importantly, capital gains reform does not require new federal bureaucracy, lengthy regulatory implementation, or complex grant programs. It modernizes an existing tax framework to encourage market activity and unlock housing supply that already exists.

For nearly three decades, the capital gains exclusion has remained unchanged despite significant increases in home values and dramatic shifts in housing markets across the country. The result is a tax code that is increasingly disconnected from today’s economic reality.

If Congress is serious about improving housing affordability, expanding inventory, and strengthening economic mobility, modernizing capital gains policy should be the next step in thatsolution. The More Homes on the Market Act offers a pragmatic starting point. At a moment when bipartisan housing activity is on the rise, this reform deserves serious consideration—and timely action.