Could changing the capital gains tax exclusion unlock more home sales?

For many homeowners, especially those at or near retirement age, selling a home isn’t just about moving — it’s about unlocking equity they’ve built over decades. But one of the biggest barriers to selling is the federal capital gains tax on real estate.

Under current law, individuals can exclude up to $250,000 in profit from the sale of their primary home from capital gains tax. Married couples filing jointly can exclude up to $500,000. Anything over those amounts is taxed. To qualify, the seller must have lived in the home for at least two of the past five years.

Those numbers haven’t changed since 1997. In the meantime, home values have skyrocketed in many parts of the country — including here in the Lowcountry — and more homeowners are finding themselves over the threshold. The National Association of Realtors estimates that more than a third of homeowners would now be subject to capital gains tax if they sold.

There has been talk in Washington about changing the rules. Former President Donald Trump has said he is open to eliminating the capital gains tax on home sales altogether. Two bills have been introduced in Congress — one by Rep. Marjorie Taylor Greene (R-Ga.) to remove the tax entirely, and another by Rep. Jimmy Panetta (D-Calif.) to double the exclusion to $500,000 for individuals and $1 million for married couples, adjusting for inflation since 1997.

David Holtzman, staff writer at Homes.com reports that by raising or removing the exclusion limits, more homeowners would be encouraged to sell, helping to free up inventory at a time when high mortgage rates and potential tax penalties are keeping many on the sidelines. Retirees in particular could benefit, giving them an opportunity to downsize and keep more of their hard-earned equity tax-free.

Of course, the economic impact is hard to predict. Experts note that while more sellers could increase supply and potentially lower home prices, removing a tax barrier could also encourage more buyers, boosting demand and possibly pushing prices back up.

For now, homeowners looking to reduce potential capital gains taxes should keep detailed records of qualifying home improvements and original purchase costs, including transfer taxes and title insurance.

Gary Smythe is a local Real Estate Agent with William Raveis Real Estate specializing in Bluffton and Hilton Head Island.
Gary@GarySmythe.com. www.WilliamRaveis.com/GarySmythe