The federal US Capital Gains Tax Exclusion limit applied to home sales is set to double for the first time in nearly 30 years under newly proposed federal legislation.
According to a report by Realtor.com on August 11, the U.S. Congress is currently pushing forward a bill titled the “More Homes on the Market Act.” The legislation aims to increase the current tax-free profit limits on primary residence sales from $250,000 to $500,000 for individual filers, and from $500,000 to $1,000,000 for married couples filing jointly.
This policy initiative seeks to modernize tax codes that have remained unadjusted since 1997 despite soaring real estate prices. Lawmakers hope the adjustment will unlock housing inventory and ease the financial burden on seniors looking to downsize.
Addressing the Housing Market Lock-In Effect
The newly introduced bill also contains a provision to automatically index future exemption limits to inflation rates.
Industry analysts expect that updating the exclusion bounds will mitigate the so-called “lock-in effect,” where homeowners withhold properties from the market purely to avoid heavy capital gain tax hits. The National Association of Realtors (NAR) estimates that approximately 13 million homeowners nationwide currently face potential capital gains liabilities if they choose to sell.
The tax pressure is particularly acute among retired seniors hoping to transition from larger family residences to smaller homes. Because many delay selling due to anticipated tax exposure, existing housing inventory remains restricted.
Relief for Long-Term Homeowners and Seniors
Homeowners in high-cost housing markets such as California stand to be direct beneficiaries of the legislation.
“If this new bill passes, capital gains taxes could drop significantly or be eliminated entirely,” said Jin Hong Nam, Board Chairman of the Korean American Real Estate Association of Southern California. “It will be an exceptional opportunity for seniors who have hesitated to downsize solely due to tax concerns.”
Real-World Tax Calculation Example
The proposed changes could drastically alter federal tax liabilities during actual property sales.
For instance, consider a property purchased in 2013 for $650,000 and sold for $1,500,000. The nominal profit stands at $850,000. Assuming $50,000 in closing costs and related selling expenses, the adjusted net capital gain equals $800,000.
Under current tax regulations, a married couple filing jointly deducts the maximum $500,000 exemption, leaving $300,000 subject to federal taxation. Applying standard rates between 15% and 20%, the resulting federal tax liability ranges from $45,000 to $60,000.
Under the proposed framework, however, the entire $800,000 profit falls within the new $1,000,000 joint limit, completely eliminating federal capital gains tax liability for the transaction.
Legislative Status and Future Steps
The proposed legislation remains in its early parliamentary stages. The respective House and Senate versions have been referred to the House Ways and Means Committee and the Senate Finance Committee.
Neither committee has held formal hearings or votes yet. To take effect, the final unified bill must pass both houses of Congress and receive the President’s signature.
By Eunyoung Lee
