Capital Gains Tax Cuts for Home Sales: Will It Fix Housing Affordability?

As the U.S. Grapples with a persistent housing shortage, lawmakers are exploring various solutions, including potential changes to capital gains taxes on home sales. Recent proposals range from modest adjustments to significant overhauls, sparking debate among experts about their potential impact on affordability and housing supply.

Sens. Ted Cruz, R-Texas, and Tim Scott, R-S.C., recently urged Treasury Secretary Scott Bessent to leverage executive authority to reduce capital gains taxes. Their proposal centers on indexing an asset’s “basis,” or original purchase price, to inflation. Currently, capital gains are calculated as the difference between the sale price and the original basis. Indexing would adjust the basis to reflect current dollar values, potentially lowering the tax liability for sellers.

According to the lawmakers, this tax break could incentivize long-time homeowners with substantial equity to sell, thereby increasing the supply of homes available to prospective buyers.

The push for tax reform comes as the U.S. Housing supply gap continues to widen. Realtor.com reported an estimated shortage of 4.03 million homes in 2025, up from 3.8 million in 2024, highlighting the urgency of finding solutions to increase housing availability.

Cruz and Scott aren’t alone in seeking capital gains tax reform. In 2025, bipartisan lawmakers introduced the “More Homes on the Market Act,” which proposes doubling the current capital gains exemptions for primary home sales and adjusting those figures annually for inflation. The bill, if enacted, would raise the exemption to $500,000 for single filers and $1 million for married couples filing jointly, a significant increase from the current $250,000 and $500,000 limits, which haven’t been updated since 1997.

The Republican Study Committee has proposed even more extensive changes, including eliminating capital gains tax entirely on properties sold to first-time homebuyers and on sales of rental homes to tenants. Former President Donald Trump also expressed interest in eliminating capital gains tax on primary home sales in July, though he linked the idea to potential interest rate cuts by the Federal Reserve.

An increasing number of homeowners are exceeding the current capital gains exclusion limits. A 2025 report from the National Association of Realtors indicated that 34% of homeowners could exceed the $250,000 exemption for single filers, and 10% could exceed the $500,000 limit for married couples.

A 2025 analysis from The Budget Lab at Yale found that those exceeding the limit typically have higher incomes and greater wealth. Those exceeding the limit may pay up to 20% capital gains tax on excess profits, with some higher earners also subject to an additional 3.8% net investment income tax.

Experts are divided on whether capital gains tax reform will effectively address the housing affordability crisis. Some argue that reducing the tax burden will encourage more homeowners to sell, increasing supply and easing price pressures. Others are skeptical, suggesting that other factors, such as limited construction and zoning regulations, play a more significant role.

A February report from Brookings found that most senior households would not benefit from expanded capital gains exemptions, and the policy would likely have a limited impact on seller behavior. Howard Gleckman, a nonresident fellow at the Urban-Brookings Tax Policy Center, stated that taxes are not a primary consideration for most older homeowners deciding whether to sell.

What are capital gains taxes?

Capital gains taxes are taxes on the profit made from selling an asset, such as a home, for more than you originally paid for it.

What is the current capital gains exemption for home sales?

Single filers can exclude up to $250,000 of profit from the sale of their primary residence, although married couples filing jointly can exclude up to $500,000.

Could these tax changes actually increase housing supply?

Some experts believe it could, by incentivizing homeowners to sell. Others are skeptical, pointing to other factors impacting supply.