Since 1997, a significant tax break is the ability to exclude up to $250,000 of gain on sale of your principal residence if used 2 years of the 5 years prior to sale ($500,000 gain exclusion if married filing jointly and both spouses meet the 2 years of use requirement). This exclusion can be used every two years.
In December 2025, the U.S. Census Bureau reported that the median home price in the U.S. is $414,400. That sure makes a $500,000 gain exclusion seem like a big number.
Of course, there are a few parts of the country, such as San Jose, where people may easily have over $500,000 of gain upon sale of their residence. In that case, if married, they exclude $500,000 (saving taxes possibly of up to 18.3% or 23.8% on that excluded gain). Let's say the gain is $600,000 and they are in a 20% capital gain bracket + likely owe the 3.8% NIIT. They will have to pay $23,800 of capital gain tax on the $100,000 taxable gain. That sounds like a great deal given they had $600,000 of income! If that had instead been wages, stock gain or gain from sale of real property that was not their residence, it would all be taxable.
There are a few bills in the 119th Congress that would exclude all of the gain on sale of a principal residence, such as H.R. ____, Don't Tax the American Dream Act. Per sponsor Rep. Goldman, this would increase the national housing supply and repeal "costly taxes" on homeowners. He also notes that the $250,000 and $500,000 amounts have not been adjusted for inflation since 1997. Similarly see H.R. ___, Middle Class Home Tax Elimination Act. Sponsor Rep. Fitzgerald also notes that the Section 121 dollar amounts have remained constant since 1997.
I don't think the lack of inflation adjustment justifies this possible tax change because the exclusion amounts were already quite high in 1997 - particularly given that 29 years later the median home price is roughly $414,000 (making a $500,000 gain impossible). The relatively few people who will benefit from allowing any amount of gain to be excluded is much smaller than the number of individuals who would benefit from adding an inflation factor to other rules that lack them, such as the child care credit ($3,000 for 1 child and $6,000 for 2 or more children at this dollar amounts for over 20 years) and the taxation of Social Security benefits (dollar amounts set over 30 years ago).
And why no limit at all for the proposals that allow all of the home gain to be excluded. This is a tremendous benefit to those with very high value homes that have far more appreciation than lower value homes. Do a search for example, for movie and music stars who have sold homes for millions of dollars of gain - why should that all be tax free? (here is one example I found - perhaps $46 million of gain in 2021 (although there may have been improvements made in the 25 years of ownership reducing that gain) - but still a multimillion dollar gain - story here).
So, why not keep the high exclusions where they are now and use the savings from not increasing them for a small number of individuals and instead use those dollars to either keep our deficits lower or to add inflation adjustments to provisions that would benefit many more taxpayers, such as people paying for child care so they can work. I'm not sure where you find child care today for $3,000 per year for one child (note that OBBBA increased the rate of this credit, but not the decades old dollar amounts).
What do you think?
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