Extending
the capital gains tax exclusion for primary residences to $1 million
would likely add to the US home supply in 2026 by reducing the
"lock-in effect" that keeps older homeowners and those with high
equity from selling. By modernizing the 1997-era thresholds ($250k/$500k), this
change is expected to free up "accidental luxury" homes and larger,
family-sized homes that are currently held to avoid significant tax
bills.
Impact
on 2026 Home Supply:
Reduced
"Lock-In" Effect: Many homeowners, particularly baby boomers,
are reluctant to sell their homes and move to smaller ones due to the potential
tax burden on their significant accumulated home equity.
Increased Inventory:
The National Association of Realtors (NAR) argues that increasing these limits would cause a significant rise in the number of homes listed for sale, particularly in high-appreciation markets.
Targeted Impact: While only a small percentage of total homeowners currently exceed the $500,000/$1 million threshold, they are often in areas with extreme supply shortages. By 2030, a projected 56% of homeowners could have equity exceeding the current, lower, outdated, limit, making this reform increasingly relevant to overall supply.
"Filter Down" Effect: Increased listings of higher-priced, "move-up" homes would allow older homeowners to downsize, creating a "trickle-down" effect that increases available, more affordable homes for buyers.
Considerations and Counterarguments:
Limited Scope: Some studies suggest that only about 10–15% of homeowners currently have capital gains that exceed the existing exemption, meaning the direct impact might be concentrated among wealthier, older homeowners.
Market Drivers: The primary constraints on supply in 2026 are likely to remain high mortgage rates and overall housing affordability, rather than just the capital gains tax.
Revenue Loss: The policy would reduce federal revenue by millions annually, though some argue this is a minimal price for improving market mobility.
Legislative proposals, such as the "More Homes on the Market Act," are actively pushing to increase these thresholds to $500,000 for individuals and $1 million for married couples.
In 2026, extending the capital gains tax exclusion for primary residences to $1 million for married couples (and $500,000 for single filers) is widely expected by economists and industry groups to increase the U.S. home supply by reducing the "lock-in effect".
Current legislative momentum, particularly through the More Homes on the Market Act, aims to address inventory shortages by modernizing limits that have been stagnant since 1997.
Impact
on Home Supply
Inventory Growth: The National Association of Realtors (NAR) estimates that reforming or eliminating the capital gains tax could boost housing supply by 10–15%.
Unlocking "Stuck" Homeowners: By 2026, an estimated 1 in 3 homeowners (approx. 29 million households) will have built up equity exceeding current exclusion limits ($250k single/$500k married). Many "accidental luxury" owners—who bought ordinary homes decades ago that are now worth significantly more—delay selling to avoid large tax hits.
Incentivizing Downsizing: Raising the cap would specifically encourage older homeowners and baby boomers to sell larger family-sized homes and downsize, potentially unlocking hundreds of thousands of move-up homes per year.
Current
2026 Status & Proposals
IRS Indexing (Confirmed): Starting in 2026, the IRS has confirmed it will begin indexing the existing $250,000/$500,000 exclusion for inflation, providing modest relief but not reaching the $1 million threshold without new legislation.
Pending
Legislation:
More Homes on the Market Act: A bipartisan bill to double the exclusion to $1 million for couples and $500,000 for individuals.
No
Tax on Home Sales Act: A more drastic proposal to eliminate the tax
entirely for primary residences.
Market Concentration: The benefit would be most significant in high-appreciation markets where $1 million homes are now considered starter benchmarks.
Potential
Trade-offs
While increasing supply, some analyses suggest risks such as increased competition at the lower end of the market as downsizers bid against first-time buyers, potentially keeping prices high. Experts also note that while supply increases, it may primarily benefit wealthier, older homeowners who hold the most equity.
Comments
Increasing the Capital Gains Tax Exclusion to $1 million would allow Retired Couples, Widows and Widowers to Sell their Homes and “Downsize”. This would provide a larger Cash Reserve to deal with increased “out of pocket” Medical Costs and continued Home Related Expenses. Many of their current Homes are priced between $500,000 and $1 Million.
Norb Leahy, Dunwoody GA Tea Party Leader
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