Why Outdated Capital Gains Tax Rules Are Hurting Homeowners

Homeownership has long been one of the most reliable ways Americans build wealth. Even with today’s affordability challenges, the dream of owning a home remains strong—because it’s not just about having a place to live, but about building equity and securing a financial future.

For many, that equity becomes a nest egg—used to fund retirement, support family, or pass down to the next generation. But now, an outdated tax rule is turning what was once a reward into a financial penalty.

In 1997, Congress simplified how profits from selling a primary home are taxed. The updated law allowed homeowners to exclude up to $250,000 in profit if single, or $500,000 if married and filing jointly. At the time, it was a major win. But the exemption was never tied to inflation.

Since then, home prices have surged more than 260%, while the exclusion amount has stayed the same. If the exemption had kept pace, it would now be about $660,000 for individuals and $1.32 million for couples. This mismatch is creating serious financial strain for long time homeowners.

A recent analysis from the National Association of REALTORS® found that nearly 1 in 3 homeowners—around 29 million households—now have more equity than the tax exemption protects. By 2030, more than half of all homeowners are expected to fall into that category.

In Tennessee, 36% of homeowners exceed the $250,000 exemption, and 8.3% surpass the $500,000 limit. In hot markets like Middle Tennessee, where prices have soared, many feel stuck—unable to sell without a hefty tax bill. Some even hold onto their homes until death, just so their heirs can avoid the capital gains tax through a stepped-up basis.

If Congress doesn’t act, projections show that by 2035, 13 states could see 90% or more of their homeowners exposed to capital gains taxes when they sell.

But there’s a glimmer of hope. A bipartisan proposal—the More Homes on the Market Act—would double the current exemptions to $500,000 for individuals and $1 million for married couples. This change would restore the law’s original purpose: to protect everyday homeowners, not penalize them for doing exactly what homeownership was always meant to do—build wealth.