The Capital Gains Exemption is Aging Along with the Baby Boomers

The median home price today is $419,300, according to Realtor.com. The cap on those capital gains taxes remains the same. Many people complain that that means that three decades of appreciation is being measured against a static yardstick. Last week, the National Association of Realtors released its May 2026 report, The Growing Gap Between Home Prices and Capital Gains Limits, and the findings echo something I wrote about 6 months ago: 29 million American homeowners ( 34% of all owneroccupied households) have enough equity to exceed the current $250,000 cap. Another 8 million (10% of owner-occupied households), could have enough to surpass the $500,000, married-couple threshold. Therefore, 44% of people might have to pay a hefty sum in taxes upon the sale of their primary residences. If you like projections, know that NAR projects that by 2030, more than 56% of homeowners could have equity exceeding $250,000, and by 2035 that could rise to nearly 70%, with 38% surpassing $500,000. (The last two years of uncertain data make me hesitant to think that this projection is much more than just a guess.)

H.R. 1340, the More Homes on the Market Act, is the legislative response to the primary residence capital gains tax worry that is currently working through Congress. Under this bill, an individual may exclude from gross income up to $500,000 on the sale of a principal residence, double the current $250,000, while married couples filing jointly could exclude up to $1 million. The bill also proposes indexing both thresholds to inflation going forward, which seems like a reasonable thing to add to this kind of exemption.

Butis this the right solution to the right problem? I ask, “cui bono?” [But first let me emphasize, I’m not a CPA, I’m just a realtor. None of this is tax advice, it is opinion; I am laying out some real-life problems that I have seen my clients struggle with when they realize that they may be subject to a hefty tax if they sell their homes.]

Consider a client of mine who received her home in a divorce settlement. She originally bought it with her then-husband in 1999 for $240,000, kept it through two recessions, raised her children in it, and today it’s worth $650,000. Her gain is $410,000. That’s not a crazy gain, given what has happened in some markets during those years. If she had stayed married, there would be no capital gains tax that would need to be paid if they sold the house. However, under current law, as a divorcée, she may owe capital gains tax on $160,000 of that (which is the amount exceeding her $250,000 single-filer exclusion, over the cost of the home). At the standard long-term capital gains rate of 15%, that’s a $24,000 federal tax bill before her state’s tax is calculated. If she’s in a higher income bracket, (very possible if she is a new empty nester just realizing she can finally downsize but still in prime earning years) that rate might climb to 20%, and she may also be subject to the 3.8% net investment income tax, which could bring her potential federal liability to over $36,000.

She wasn’t flipping homes or speculating on the housing market. She held a home for over 25 years and participated in normal market appreciation. The tax she faces is a function of time and a policy that never anticipated how dramatically American home prices would rise in the post-pandemic era. As advocates for reform have noted, the 1997 original exemption levels have lost roughly half their value after inflation. If the thresholds had been updated to reflect the median housing price, they would now be approximately $715,000 for single filers and $1,430,000 for married couples. Whoa. Under an inflation-adjusted standard, this woman would owe nothing. Instead, she faces a tax bill that functions, in effect, as a penalty for not selling sooner, which is precisely the kind of lock-in effect the market can’t afford. And, she now debates whether she should just age out in a large home built for a larger family, rather than downsize.

When an older homeowner decides not to sell, it limits the number of homes on the market, causing first-time home buyers to face higher prices and more competition. That’s the structural reality of our housing supply crisis that, according to Realtor.com, reached a shortage of 4.03 million homes in 2025.

And when people argue that someone like this “should” pay a tax when they sell the house, they should also realize that it’s exactly this sort of tax that make someone like this woman decide to keep the house, perhaps rent it, put it into a trust, and leave it to her children, who, in many cases, will probably pay no capital gains taxes from its sale after they have inherited it.

This is where the reform conversation needs to be more honest, because the inventory-unlocking argument carries a significant complication built into our demographics.

For the second straight year, Baby Boomers accounted for the largest share of home buyers at 42% and home sellers at 55%, according to NAR’s 2026 Generational Trends report. Many Baby Boomers lived in their homes for over 15 years, giving them time to build up equity that’s then used for a future home purchase. Over half of both Younger Boomers and Older Boomers used proceeds from a primary home sale as the down payment for their next home.

Read that carefully. Baby Boomers aren’t just selling into the market. They’re buying back into it. Their soaring home equity from decades of ownership allows them to be stronger financially than other age groups who are struggling to afford higher home prices at the same time as they are paying soaring costs for their children, insurance, food, vehicles and more. The Baby Boomers have largely raised their children, often are receiving Medicare, may have pensions that will not exist for the younger generations, and many don’t have to worry about the daily commute and the gas prices that go with that. They sell homes, pocket the gain, and purchase again, frequently with all-cash or with a substantial down payment that puts them at a tremendous advantage over every first-time buyer in the same market.

This is the friction point that I’ve noticed reform advocates skate right past. Doubling the capital gains exclusion would, in theory, encourage more Baby Boomers to list their homes. But it would also hand them an even larger, untaxed pool of equity to use on their next purchase, in a market already being dominated by equity-rich buyers. First-time buyers dropped to just 21% of all purchases, the lowest share since tracking began in 1981. That is a jaw-dropping figure. Middle-income buyers can now afford only 21% of listings nationwide, down from 50% pre-pandemic. If the effect of the proposed change in the exemption rates is to supercharge the purchasing power of the generation already commanding 42% of buyer activity, the “inventory unlock” argument for this change becomes very convoluted.

I am not arguing against reform. I’m arguing about who benefits from the proposed reform. A Baby Boomer who lists a four-bedroom home and then uses $800,000 in untaxed equity to compete for a smaller home in the same zip code hasn’t solved a supply problem. He’s moved it and potentially has raised the sales price for the neighbors’ homes.

There’s another structural failure embedded in Section 121 that I worry about a lot (and have seen more times than I’d like) which deserves its own fix, and it requires understanding something about how the law currently handles some of life’s biggest disruptions.

Under current law, a surviving spouse can claim the full $500,000 exclusion only if the home sale occurs within two years of the spouse’s death and the requirements were met immediately before that death. Miss that two-year window, for any reason, including grief, health complications, estate settlement delays, or the simple reality that selling a home in the middle of loss is a challenge, and the surviving spouse drops to the $250,000 single-filer cap. A woman who bought a home with her husband 40 years ago, who met every ownership and residency requirement as part of a couple, loses half her exclusion because she didn’t sell fast enough after he died.

Divorce creates a parallel inequity, as I showed in my first narrative. When one spouse receives the family home in a settlement, they carry forward the full appreciation history of a jointly-owned asset, but years later, must claim it alone when they go to sell. The gain that accumulated during a marriage gets taxed at a single-filer rate after the marriage ends. The IRS does allow some attribution rules to help with the length of ownership portion of the exemption, but the monetary exclusion ceiling doesn’t change. And statistics show that in divorce, women are the most likely party to keep the family home, not because they can afford it, but because they want to provide some stability for young children who are already adjusting to changes in their family.

The difference isn’t always visible on a business card — it shows up in how decisions get made, what information gets shared, and whose interests the agent is actually protecting.

Current legislative debate hasn’t gone far enough into articulating how the exemption is flawed and could become fairer. The threshold frozen since 1997 should be looked at, but so should a generation continuing its equity dominance at the expense of first-time and younger buyers, and a tax structure that punishes the end of a marriage as narsnly as 1t punishes long tenure.

My first proposal is to tie the exclusion to time in the home. The current law requires only two years of primary residency to qualify for the full exclusion, regardless of whether the seller has lived there five years or thirty-five. There are many people who move every two years to bank that capital growth, and those who just move when a new need or condition arises. Maybe there’s a way to gradually increase the benefit with length of ownership that doesn’t incentivize a set amount of time or treat a two-year tenure the same as a twenty-year one.

What if the exclusion scaled with years of ownership? Under this kind of structure, the H.R. 1340 thresholds of $500,000 for single filers and $1 million for married couples could serve as a ceiling, reached only after, say, twenty years of continuous primary residency. Sellers with shorter tenures would qualify for a proportionally smaller exclusion, still better than what current law provides, but not the full benefit. The rationale would be that people most legitimately burdened by the static cap are the long-tenure owners, the ones sitting on 20 and 25 years of appreciation with no intention of gaming the system. I believe this structure would direct the largest tax relief precisely at these people, and there’s economic logic behind it. According to research from the American Enterprise Institute (AEI), seniors who have owned their homes for 30 or more years have average capital gains of $563,000, while seniors who have owned for 10 to 19 years have average gains of $338,000. A flat exemption treats both identically. The Congressional Research Service has noted that the existing law contains no rationale in its legislative history for why two years serves as the qualifying threshold, and proposals have been raised in previous Congresses to alter the structure of the exclusion, including the possibility of a larger lifetime exclusion that would eliminate the penalty for holding one’s home for a long period. An approach scaled to tenure in home borrows from that logic without requiring the administrative complexity of a lifetime account.

The benefit for inventory is also better targeted. AEI research estimates that a meaningful reduction in capital gains lock-in effects could increase home sales by approximately 15% per year, and they would immediately address a portion of the housing shortage, especially for move-up family households, potentially setting off a chain of moves that promotes redistribution of home sizes so supply and demand are better matched. A tiered structure concentrates that effect on the sellers most likely to act on the incentive (read: the longest-tenure owners) rather than spreading a blanket benefit across sellers who would have listed anyway.

A tenure-scaled exemption partially addresses the Baby Boomer cycling problem. A Baby Boomer who sells after 20 years and downsizes into something smaller gets the full relief they’ve earned. A Boomer who bought five years ago and is cycling through properties to capture appreciation would qualify for considerably less. That distinction matters if the policy goal is genuinely to reward long-term community investment rather than simply to expand a tax benefit that flows disproportionately to those already winning in the current market.

My second proposal is a fix for the divorce/death circumstances. Why not allow any homeowner selling a property that was purchased as a married couple (whether the marriage ended through divorce or the death of a spouse) to retain access to the full, joint-filer exclusion for that specific property, regardless of current filing status? The gain accumulated during a partnership shouldn’t be re-adjudicated under solo rules simply because the partnership dissolved. The legal structure for something like this already exists in embryonic form. The Mortgage Forgiveness Debt Relief Act of 2007 established the surviving spouse provision precisely because Congress recognized the inequity of dropping a widow or widower to a single-filer cap on a home they’d owned jointly. The problem is that the two-year window is often too narrow and may force drastic changes for someone who has already been handed an emotionally and financially burdensome situation that they have to work through. And the divorce analog was never addressed at all.

Extending the surviving spouse exclusion beyond two years, and creating a provision for divorcing homeowners selling a once-jointly-purchased primary residence, would close a gap that disproportionately affects women. We can assume that the divorced homeowner and the surviving spouse are people who planned their financial lives around a joint-household assumption and are now being taxed at a rate that assumes they never did.

A February 2026 analysis from the Brookings Institution found that even under current law, 95% of all households, and 90% of households aged 65 and older, would owe no federal capital gains tax on a home sale because their accrued gains fall below existing exclusion thresholds. Raising the tax-exempt level, Brookings concluded, would have no effect on them, and would instead provide large benefits to a small group of high-income, high-wealth households.

In 2022, homeowners with profits above the exemption were typically wealthier and with higher income (according to analysis from The Budget Lab at Yale). The reform, framed as relief for ordinary-type homeowners locked in by tax liability, would, more than likely concentrate its largest benefits on a relatively small segment of high-equity, high-net-worth sellers. The woman who bought in 1999 for $240,000 gets genuine relief. The longtime San Francisco homeowner sitting on $2 million in gains gets an even larger windfall. That person’s selling decision is influenced by factors well beyond a $250,000 increase in the exclusion ceiling.

This critique exposes the gap between the reform’s purported purpose and its likely effect. Inventory is not a problem that concentrates at the top of the wealth distribution. But the benefit of a doubled exclusion does. A scaled structure, calibrated to holding period, at least partially addresses that gap by weighting the benefit toward duration of stay rather than size of gain.

The $250,000/$500,000 threshold has flaws. It was designed for a market that no longer exists. Home prices nationally have risen 264% since 1997, with high-demand markets up even more. A threshold that hasn’t moved in 29 years is a tax increase by inaction, and the woman sitting on a reasonable, unremarkable appreciation in a mid-tier market is the person who is left holding the tax burden. Reform, or at minimum an inflation adjustment, appears overdue.

I would state that the stronger case for reform is NOT “it will dramatically unlock 931 1. og 1 re ond 1 – 1 1 1 inventory, because data suggests the supply elrect will De modest across the broad population. The stronger cases are equity (yes, I worked hard for that double entendre) and precision with the relief. The current law as written penalizes long-tenure homeowners for the market’s own behavior, discards the financial logic of joint ownership the moment a marriage ends or after spouse dies, and treats a 25-year commitment to a home exactly the same as a two-year one. Each of those is a poor design.

What should concern policymakers, and what the current legislative proposals don’t yet fully address, is who is actually buying this supposed unlocked inventory. Buyers paying all cash continue to represent 27% of existing-home sales transactions, and first-time buyers remain at a structural disadvantage. Raising the exclusion without companion policies, (such as not treating first-time homebuyers the same as someone who has owned multiple homes) risks engineering a more efficient transfer of homes between the wealthy, and leaves the demographic who has to wait until their 40s to buy their first home watching from the sidelines.

Vd fight for combining inflation indexing with scaling the exemption for length of tenure, and a genuine fix for the divorce and death penalty buried in the current law. Done together, these proposals, I believe, would concentrate more relief on the homeowners whom it’s supposed to be helping and perhaps unlock a little bit of inventory. To me, it’s a more defensible reform than a flat doubling of the exemption. If Congress were to look at proposals like these, it might convince me more that they are looking out for someone other than the wealthy.

NAR (May 2026). The Growing Gap Between Home Prices and Capital Gains Limits.

https://www.nar.realtor/sites/default/files/2026-05/2026-The-Growing-Gap-BetweenHome-Prices-and-Capital-Gains-Limits-Report-05-18-2026. pdf

NAR (April 2026). 2026 Home Buyers and Sellers Generational Trends Report.

https://www.nar.realtor/newsroom/baby-boomers-remain-largest-share-of-home-buyers-as-first-time-buying-falls-to-record-low H.R. 1340, More Homes on the Market Act, 119th Congress. https://www.congress.gov/bill/119th-congress/house-bill/1340

Congressional Research Service (2025). The Exclusion of Capital Gains for Owner-

Occupied Housing. https://www.congress.gov/crs-product/RL32978

Gale, W., Patel, E., Rogers, T., Sabelhaus, J. (February 2026). Will Expanding the Capital

Gains Exclusion Unlock Housing Supply? Brookings Institution.

https://www.brookings.edu/articles/will-expanding-the-capital-gains-exclusion-unlock-housing-supply

Pinto, E. January 2026). Capital Gains Rules on Home Sales and Senior Homeowner

Lock-In. American Enterprise Institute.

https://www.aei.org/articles/capital-gain-regulations-on-home-sales-and-baby-boomer-lock-in/

The Budget Lab at Yale (2025). Analysis of capital gains tax liability for homeowners, cited in CNBC (March 4, 2026).

https://www.cnbc.com/2026/03/04/capital-gains-taxes-home-sales.html 26 U.S. Code § 121. Exclusion of Gain from Sale of Principal Residence. https://www.law.cornell.edu/uscode/text/26/121

Mortgage Forgiveness Debt Relief Act of 2007, P.L. 110-142. https://www.congress.gov/bill/110th-congress/house-bill/3648

NAR (April 2026). Q1 2026 Metro Home Prices.

https://www.nar.realtor/newsroom/home-prices-increased-in-71-of-metro-areas-in-first-quarter-of-2026