Capital gains tax cut for home sellers could flood market, push prices down

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Two Republican senators this week urged the Treasury to change how home sale profits are taxed, arguing it could free up housing for younger buyers — a proposal arriving as the U.S. faces a widening shortage of homes. The idea has sparked a debate among economists and housing groups over whether tax changes would actually boost supply or mostly benefit wealthier sellers.

Senators Ted Cruz of Texas and Tim Scott of South Carolina asked Treasury Secretary Scott Bessent to use executive authority to adjust a property’s purchase price, or basis, for inflation before calculating capital gains. Their pitch: reducing the tax burden on long-held properties could persuade owners with large built-up equity to list, expanding the pool of homes for first-time buyers.

Legislative and administrative paths being explored

At the same time, lawmakers in both parties introduced the More Homes on the Market Act in 2025, which would double today’s capital gains exemptions for primary residences and tie the limits to inflation. If passed as written, the exclusion would grow to $500,000 for single filers and $1 million for married couples filing jointly, up from the long-standing $250,000 and $500,000 caps set in 1997.

Separately, the Republican Study Committee’s early-year framework floated eliminating capital gains taxes in targeted cases — for example, sales to first-time buyers or transfers of rental properties to tenants — and President Donald Trump has publicly expressed interest in dropping capital gains on home sales under some scenarios.

Why this matters now

The timing matters because the housing shortage has worsened. Realtor.com estimated the U.S. faced a shortfall of about 4.03 million homes in 2025, up from roughly 3.8 million the year before. Any policy that meaningfully increases listings could relieve price pressure, but whether tax changes would be sufficient is contested.

Indexing basis for inflation (Cruz/Scott): Could lower taxable gains for long-time owners and potentially nudge some to sell; implementation might be done administratively.

Doubling exemptions (More Homes on the Market Act): Raises the tax-free profit threshold to $500,000/$1 million and adjusts for inflation; requires congressional approval and would reduce tax receipts.

Targeted elimination (RSC proposal): Seeks to remove capital gains on specific transfers (e.g., to first-time buyers or tenants); advocates say this would expand starter-home supply, critics warn it could be complex to enforce.

Who stands to gain — and who would actually move

Advocates point to growing numbers of homeowners whose sale profits exceed current exclusions. The National Association of Realtors estimated in 2025 that about 29 million owners — roughly a third — could surpass the $250,000 limit for single filers; roughly 8 million could top the $500,000 joint limit.

People who exceed those thresholds tend to be higher-income sellers. Those gains above the exclusion are taxed at long-term capital gains rates — up to 20% depending on income — and some sellers also face the 3.8% net investment income tax.

Experts divided on whether tax changes will boost listings

Supporters include conservative tax groups and some policy researchers who argue that raising or indexing exclusions could coax more homes onto the market.

But other analysts caution the effect may be limited. A Brookings Institution report in February found that most older homeowners — who hold much of the nation’s equity — would not change plans based primarily on tax incentives, citing nonfinancial reasons people stay put: family ties, health, neighborhood stability and the hassle of moving.

“Taxes are rarely the decisive factor for seniors when they choose whether to leave a long-term home,” said one housing policy researcher who has studied aging and mobility.

What’s next for the proposals

The House and Senate bills have been introduced but remain in committee. The Cruz and Scott request seeks an administrative rule change that could be faster but might face legal and practical hurdles. Any congressional measure would also carry budget implications, since raising exclusions or eliminating taxes reduces revenue.

For homeowners and buyers, the stakes are clear: lawmakers are debating tools that could alter future tax bills and, potentially, the number of homes on the market. Whether those tools will ease prices or mostly shift tax burdens among income groups is likely to shape the next phase of the policy discussion.