Tax planning

Homeowners Face Potential Capital Gains Tax on Home Sales as Exclusions Fail to Keep Pace wiht Inflation

Washington D.C. – A growing number of homeowners may soon be subject to capital gains taxes on the sale of their primary residences, as the current exemption thresholds, established in 1997, have not been adjusted for inflation. This means that as home values continue to rise, more individuals are likely to exceed the $250,000 (for single filers) and $500,000 (for married couples filing jointly) profit limits, possibly triggering tax liabilities.

The capital gains exclusion for home sales, enacted over two decades ago, has remained static while the median home sales price has surged by nearly 190% since 1997, according to Federal Reserve data. This significant increase in home values means that long-time homeowners, in particular, are increasingly likely to see their profits surpass the existing exemption amounts.

When profits from a home sale exceed these thresholds, capital gains taxes can be levied at rates of 0%, 15%, or 20%, depending on the seller’s taxable income. Moreover, any profit above these limits could also be subject to the 3.8% net investment income tax, depending on an individual’s overall investment earnings, as outlined by the IRS.

A 2025 study by the National Association of Realtors (NAR) indicates that approximately 29 million homeowners,or 34% of single filers,could exceed the $250,000 threshold. For married couples filing jointly, an estimated 8 million, or 10%, might surpass the $500,000 limit.The NAR has been a vocal advocate for reforms to capital gains tax rules on home sales, noting that homeowners in states like Washington, California, Utah, and Massachusetts are more likely to be affected by these potential tax implications.

experts suggest that homeowners can potentially reduce their taxable profit by including the cost of capital improvements, such as significant renovations, in their home’s original purchase price. However, even with these adjustments, the current exemption levels are a growing concern for many.

An analysis from The Budget Lab at Yale University suggests that any potential elimination of capital gains taxes on home sales would primarily benefit older and wealthier individuals. Meanwhile, Howard Gleckman, a senior fellow at the Urban-Brookings Tax policy Center, has indicated that legislative efforts are more likely to focus on raising the exemption thresholds rather than eliminating the tax entirely.