After decades of rising property values, the capital gains exclusion for home sales no longer offers the protection many investors and high net worth homeowners expect. The $250,000/$500,000 thresholds set in 1997 haven’t kept pace with today’s market, leaving sellers vulnerable to taxes that can significantly reduce the returns on their real estate investments or the equity in their primary residences.
How the Home Sale Exclusion Works
Section 121 of the Internal Revenue Code (IRC), part of the Taxpayer Relief Act of 1997, allows homeowners to exclude up to $250,000 of capital gains ($500,000 for married couples filing jointly) when selling their primary residence. To qualify, sellers must have owned and used the home as their primary residence for at least two out of the last five years before the sale.
At the time, the exclusion simplified tax rules, replaced a more complex system, and encouraged mobility. In 1997, the median U.S. home price was about $127,000. The $250,000/$500,000 exclusion effectively shielded nearly all typical home sales from capital gains taxes.
The Growing Gap Between Exclusion and Market Values
Today, median home prices range from $400,000 to $460,000 nationwide, with many markets exceeding $1 million. Increasing property values benefit investors and homeowners, but they also expose many to unexpected tax liabilities.
For instance, a couple who bought a property in New York in 1997 for $300,000 could sell it for $1.5 million in 2025. After applying the $500,000 exclusion, they would still owe taxes on $700,000 of gains — roughly $140,000 — well beyond what Section 121 was intended to cover.
Adjusted for inflation, the 1997 thresholds are approximately $475,000 for singles and $950,000 for married couples in 2024 dollars. Many homeowners now exceed these limits, even after accounting for improvements and selling costs. For investors, this can notably decrease net returns and influence portfolio planning.
How Homeowners Are Impacted
The unchanged exclusion affects more than taxes:
- Wealth realization: Longtime homeowners might encounter significant, unexpected tax bills when selling high value homes.
- Portfolio strategy: Investors who hold properties for decades might face taxes on gains that discourage strategic sales.
- Market mobility: To avoid taxes, sellers might delay moves, postpone reinvestment, downsize, or reduce inventory for buyers.
High value homeowners in costly markets are particularly vulnerable, as years of appreciation can transform moderate or investment properties into “tax traps.”
Arguments for Modernization
Updating Section 121 could restore its original purpose: protecting ordinary and strategic homeowners from punitive capital gains taxes. Linking the exclusion to inflation or regional home prices, similar to other deductions like the standard deduction, would ensure fairness and consistency.
Congress has paid attention:
- More Homes on the Market Act (H.R. 1340): Introduced by Rep. Jimmy Panetta (D, CA) in February 2025, this bill attempts to increase the exclusion for primary residence sales. Although specific numbers are not provided, previous proposals indicate doubling the current thresholds or adjusting for inflation.
- No Tax on Home Sales Act: Proposed by Rep. Marjorie Taylor Greene (R GA) this legislation would eliminate federal capital gains taxes on primary residences for qualifying homeowners, a broader measure that directly benefits high net worth sellers.
Both proposals attempt to enable homeowners to sell, downsize, or relocate without facing punitive taxes, primarily benefiting retirees, investors, and families who rely on long-term gains to fund retirement or reinvest in real estate portfolios.
What This Means for Investors and High Value Homeowners
Modernizing Section 121 provides immediate benefits:
- Preserve equity: Protect hard-earned gains from unexpected taxation.
- Enhance portfolio flexibility: Enable strategic sales, reinvestment, and property diversification without incurring tax penalties.
- Support retirement planning: Tap into equity for healthcare, relocation, or lifestyle expenses.
- Boost market efficiency: Promote the sale of long-held properties to reduce inventory shortages and stabilize prices.
Protect Your Equity and Plan Ahead
The $250,000/$500,000 exclusion worked in the late 1990s, but is now viewed as inadequate by many. Without updates, more homeowners and investors will face capital gains taxes they never expected to have to pay. Regularly updating and modifying the exclusion is essential to safeguard homeownership, ensure tax fairness, and help families and investors maximize their real estate profits.
Connect with our real estate advisors to discuss how these changes may affect your portfolio and strategies to preserve your gains.
© Copyright CBIZ, Inc. All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. Material contained in this publication is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their organization.
“CBIZ” is the brand name under which CBIZ CPAs P.C. and CBIZ, Inc. and its subsidiaries, including CBIZ Advisors, LLC, provide professional services. CBIZ CPAs P.C. and CBIZ, Inc. (and its subsidiaries) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations, and professional standards. CBIZ CPAs P.C. is a licensed independent CPA firm that provides attest services to its clients. CBIZ, Inc. and its subsidiary entities provide tax, advisory, and consulting services to their clients. CBIZ, Inc. and its subsidiary entities are not licensed CPA firms and, therefore, cannot provide attest services.
