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In This Article

  • The outdated capital gains exclusion—unchanged since 1997—is now a major barrier to housing mobility, and fixing it is one of NAR’s top federal lobbying priorities.
  • Millions of long-term homeowners are “stuck” because their home values exceed the $250,000/$500,000 limits, forcing many to pay tens of thousands in taxes when they sell.
  • Doubling the exclusion to $500,000/$1,000,000 would unlock badly needed housing inventory, energize the market, and directly benefit consumers and REALTORS® alike.

When Congress last set the capital gains exclusion in 1997, the average U.S. home cost about $145,000. Nearly three decades later, home values have more than tripled—but the tax rule hasn’t moved an inch. The lack of action on this is now pointing the US real estate market directly at a “capital gains cliff” which is poised to freeze a large portion of the real estate market without changes being made to the tax code.

Under current law, home sellers can exclude up to $250,000 in profit if single or $500,000 if married on the sale of their primary residence. Anything above that is taxed as a long-term capital gain—typically at 15–20%, plus a possible 3.8% investment surtax for higher earners. That threshold once covered almost every homeowner. Today, it’s becoming a tax trap.

The “Capital Gains Cliff” Is Here

According to research commissioned by the National Association of REALTORS® (NAR), roughly 34% of homeowners—nearly 29 million households—are already above the $250,000 cap. 10% (8 million) are above the $500,000 threshold for married couples. By 2030, those numbers are expected to roughly double, and by 2035 NAR estimates nearly 70% of U.S. homeowners will exceed the $250,000 exclusion and 38% will top the $500,000 level.

Already, in many metro areas—Seattle, San Francisco, Austin, Denver, and beyond—longtime owners could owe tens of thousands of dollars in federal taxes if they sell. That looming tax bill is causing what NAR calls the “capital gains cliff” – a growing segment of homeowners who want to move but stay put to avoid a massive tax hit. These are often retirees who’d downsize, families relocating for jobs, or owners ready to trade up but reluctant to lose their low tax basis and face the IRS.

For sellers who cross the threshold, the numbers are eye-opening:

  • A single homeowner with $350,000 in profit pays federal tax on the $100,000 gain beyond the $250,000 exempted under current law, a tax bill which totals about $15,000.
  • A married couple with $650,000 in profit pays tax on the $150,000 gain beyond the $500,000 exemption, a tax bill which totals about $22,500, and possibly more with the 3.8% surtax.

Nationwide, IRS data shows roughly half a million homeowners – or 10% – pay capital gains tax on a home sale each year. That’s hundreds of thousands of sellers sidelined or penalized simply for holding property during a period of normal market appreciation.

A recent analysis by Realtor.com shows that the problem is far worse in Washington State where homeowners are among the hardest hit in the nation. In fact, it trails only Hawaii for the percentage of homeowners above the $250,000 exemption level with a staggering 2/3 of all homeowners in Washington over the federal threshold. And for the 24.7% of households in Washington that exceed the $500,000 cap, the average gain subject to taxation is $219,114. That translates to a federal tax bill of $45,994, a massive disincentive to selling which freezes housing supply across the board.

The Fix: NAR Supports the More Homes on the Market Act

NAR’s legislative affairs team has been working aggressively with Congress on bipartisan legislation that would double the exclusion to $500,000 for individuals and $1 million for married couples, and finally index it to inflation.

Under this proposal, many of today’s “stuck” owners could sell tax-free again as was intended under the original act in 1997. That would immediately free up millions of homes now locked by tax fear, boost housing supply at a time when inventory is near record lows, and save sellers tens of thousands of dollars in taxes, creating new mobility and economic activity.

This is exactly the kind of work that proves the power and purpose of organized real estate under NAR. This issue isn’t abstract—it’s about protecting our clients, revitalizing our markets, and defending property ownership. When members pay dues, they’re investing in this kind of fight: one that can unlock homes, stabilize prices, and strengthen the entire housing ecosystem.

 NAR’s leadership on this issue is essential. REALTOR® members working together can help Congress modernize the code, open up inventory, and give America’s homeowners back the freedom to move.

The Bottom Line

  • Outdated tax limits are choking off housing inventory and punishing long-term homeowners.
  • Doubling the capital gains exclusion to $500,000/$1,000,000 and indexing it for inflation will unleash a wave of new listings, save sellers tens of thousands of dollars, and jump-start the housing market.

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