Washington D.C. – As the U.S. Grapples with a persistent housing shortage, a growing chorus of lawmakers are considering changes to capital gains taxes on home sales as a potential, though debated, solution. Senators Ted Cruz, Republican of Texas, and Tim Scott, Republican of South Carolina, recently urged the Treasury Department to take executive action to reduce these taxes, a move that could significantly impact the housing market and the wealth of homeowners. The core of their proposal centers on indexing capital gains taxes to inflation, a concept that has sparked debate among economists and housing policy experts.
The senators, in a letter to Treasury Secretary Scott Bessent this week, requested that the Treasury use its authority to adjust the “basis” – or original purchase price – of an asset to account for inflation. Currently, capital gains tax is levied on the difference between the sale price of an asset and its original cost. Indexing for inflation would effectively lower the taxable gain, potentially incentivizing long-term homeowners to sell, thereby increasing housing supply. Cruz and Scott argued this change would particularly benefit young families seeking to enter the market, though critics question whether the benefits would be widely shared.
The push for tax changes comes as the housing supply gap continues to widen. Realtor.com reported Tuesday that the gap – the difference between the number of homes available and the number needed – reached an estimated 4.03 million homes in 2025, up from 3.8 million in 2024. This shortage has contributed to soaring home prices and limited affordability for many Americans. The senators believe that easing the tax burden on sellers could unlock some of this pent-up supply.
The “More Homes on the Market Act” and Broader Proposals
Cruz and Scott aren’t alone in seeking to address housing supply through tax policy. In 2025, a bipartisan group of lawmakers introduced the “More Homes on the Market Act,” which proposes to double the existing capital gains exemptions for primary home sales and adjust those figures annually for inflation. Currently, homeowners can exclude up to $250,000 in profits (single filers) or $500,000 (married couples filing jointly) from capital gains taxes when selling their primary residence. These limits, unchanged since 1997, would rise to $500,000 and $1 million respectively under the proposed legislation. The bill remains stalled in the House Ways and Means Committee.
Going even further, an outline released by the Republican Study Committee in January as part of its “Reconciliation 2.0” framework suggested eliminating capital gains taxes entirely on properties sold to first-time homebuyers and on sales of rental homes to tenants. Former President Donald Trump also expressed interest in exploring a similar idea in July, following a proposal from former Rep. Marjorie Taylor Greene, R-Ga., to end capital gains taxes on primary home sales. Trump suggested that lowering interest rates by the Federal Reserve would be preferable, but indicated openness to the tax cut as an alternative. “If the Fed would lower the [interest] rates, we wouldn’t even have to do that,” he told reporters at the time. “But we are thinking about no tax on capital gains on houses.”
Who Currently Pays Capital Gains Tax on Home Sales?
An increasing number of homeowners are exceeding the current capital gains exclusion limits, according to a 2025 report from the National Association of Realtors (NAR). The NAR estimated that 29 million homeowners, or 34%, could exceed the $250,000 exemption for single filers, and 8 million, or 10%, could be above the $500,000 limit for married couples. Those who exceed these limits face a capital gains tax of up to 20% on the excess profits, depending on their taxable income, with some higher earners also subject to an additional 3.8% net investment income tax.
A 2025 analysis from The Budget Lab at Yale found that homeowners with profits above the exemption limits were typically wealthier and had higher incomes. This suggests that any tax cuts stemming from these proposals would disproportionately benefit higher-income households.
Impact on the Housing Market: A Divided View
Experts are divided on whether capital gains tax reform would effectively address the housing affordability crisis. Dozens of conservative low-tax organizations voiced their support for the “More Homes on the Market Act” in a letter to House Speaker Mike Johnson and Senate Majority Leader John Thune, arguing that the current tax burden discourages home sales and exacerbates the housing supply shortage. Adam Michel, director of tax policy studies at the Cato Institute, similarly suggested that expanding capital gains exclusions could “free up some housing stock.”
However, other tax policy experts are skeptical. A February report from Brookings Institution found that most senior households would see no benefit from expanding the capital gains exemptions, and that the policy would likely do little to change seller behavior. Howard Gleckman, a nonresident fellow at the Urban-Brookings Tax Policy Center, argued that factors beyond taxes play a much larger role in homeowners’ decisions to sell. “This is going to do next to nothing to solve the supply problem,” Gleckman said. “There are so many other reasons why older people don’t move from their homes. The last thing that any of them are thinking about is taxes.”
The debate over capital gains taxes and their impact on the housing market is likely to continue as lawmakers search for solutions to address affordability and supply challenges. The Treasury Department has not yet responded to the request from Senators Cruz and Scott. The next key step will be to watch for any official action from the Treasury Department regarding the proposed executive action, and to track the progress of the “More Homes on the Market Act” in the House Ways and Means Committee.
Disclaimer: This article provides information for general knowledge and informational purposes only, and does not constitute financial or tax advice. Consult with a qualified professional for personalized advice.
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