The lodestar of the American Dream is homeownership. But the current housing market presents two opposite challenges. For new buyers, low inventory and high mortgage rates have made it harder to get on the property ladder. For older homeowners, the problem is selling. Many who might like to downsize or move are locked into their current homes because they would face a large capital gains tax on the significant increase in their home’s value.
It’s a unique problem facing many retirees and pre-retirees, due to the impressive equity they have built up in their homes.
In 2025, 1 in 3 homeowners — nearly 29 million households — have built up more home equity than the federal capital gains tax exclusion for single filers. By 2030, that number is expected to grow to 56% of homeowners, according to research from the National Association of Realtors (NAR).
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
President Trump voiced his support for eliminating the capital gains taxes on home sales during a press conference on Tuesday. “We’re thinking about that,” Trump told reporters.
The current exclusion, $250,000 for single filers and $500,000 for those filing jointly, was put in place in 1997 and was never increased or indexed for inflation. Before Congress wrote the rule change, sellers could defer paying capital gains taxes on the sale of their homes if they purchased another home for the same or greater value. However, they had to keep decades of receipts and were hit with taxes if they wanted to downsize.
If the current exclusion had been indexed for inflation, the cap would now be about $660,000 for individuals and $1.32 million for couples, according to research from the University of Illinois-Chicago.
The possibilities for retirees after unlocking “locked-in” equity
Eliminating capital gains taxes on home sales, especially for older people, has several potential benefits, albeit primarily for those with significant home appreciation.
Many older homeowners have lived in their homes for decades, accumulating substantial equity due to rising property values. The current capital gains tax, even after using the existing exclusion of $250,000 for individuals and $500,000 for married couples, can be a significant financial disincentive for those homeowners to sell.
Eliminating this tax would free up that equity, allowing seniors to:
- Downsize: Move to smaller, more manageable homes without a hefty tax bill, potentially reducing their living expenses and maintenance burdens.
- Relocate closer to family or better medical care: Sell their homes and move to areas that better suit their needs as they age, without losing a large portion of their profit to taxes.
- Fund retirement or health care costs: Access the full value of their home to cover increasing living expenses, long-term care, or other medical needs in retirement.
- Improve financial security: Have more liquid assets available for unexpected expenses or to enhance their overall financial well-being.
Where the problem hits hardest
For the most part, states that have the most homeowners with equity above the current exclusions have historically had a high cost of living; they are home to some of the most expensive cities to live in the U.S, such as Hawaii, California and Massachusetts. Couples face bigger capital gains headaches than their single counterparts in New York and Washington, D.C.
|
State |
% Homeowners w/ equity exceeding the 250k exclusion (single filers) |
State |
% Homeowners w/ equity exceeding the 500k exclusion (married filers) |
|---|---|---|---|
|
Hawaii |
79.10% |
Hawaii |
46.0% |
|
Washington |
64.80% |
California |
30.8% |
|
California |
62.60% |
Washington D.C. |
25.40% |
|
Massachusetts |
62.30% |
Washington |
24.70% |
|
Colorado |
59.50% |
Massachusetts |
23.50% |
|
Idaho |
54.90% |
New York |
18.70% |
|
Montana |
53.60% |
Montana |
18.00% |
An opportunity for retirees and aspiring homebuyers
Eliminating capital gains on home sales could provide significant financial relief and increased flexibility for older homeowners with substantial home appreciation, potentially encouraging more housing turnover. The current effect of capital gains taxes on home sales is a disincentive that NAR calls the “stay-put penalty.”
“This stagnation in housing turnover is rippling through the entire market, driving up costs and limiting opportunity — exactly the opposite of what public policy should be encouraging,” says Shannon McGahn, NAR executive vice president and chief advocacy officer. “And it grows worse each month.”
Increasing housing supply: Eliminating the tax could encourage more seniors to sell their larger, long-held homes, thereby increasing the supply of houses on the market. This could, in turn, help to ease housing shortages and potentially make homes more affordable for younger generations and first-time buyers. More homes are sorely needed.
While the inventory of homes for sale is up 28.9% year over year, it remains 12.9% below pre-pandemic levels, according to realtor.com.