A dollar in 2024 has about the same purchasing power as 51 cents in 1997, but a key tax law remains stuck in the 20th century.
If you’re selling your home in 2025, you might wonder why the capital gains tax exclusion for your primary residence—$250,000 if you’re single, $500,000 for couples—remains unchanged from 1997, the year it was implemented.
Yes, this obscure but critical number has not changed since Bill Clinton lived in the White House and the world was mourning the death of Diana, Princess of Wales. And as the value of more and more home sales exceed the capital gains tax exclusion, according to a recent analysis by CoreLogic, a growing group of homeowners who want to sell are mulling whether they really want to pay a tax that was originally targeted at the wealthy.
This means that many Americans are remaining in homes they would otherwise sell. Dana Cole, an attorney in California, recently faced this dilemma. He and his wife were looking to sell their current home and a condo investment property to secure a big cash down payment for a new home.
Cole bought the one-bedroom condo in 1968 for $235,000. He lived there prior to getting married, and he and his wife lived there together until shortly after the birth of their son, when they decided they needed more space to raise a family. In the more than five decades since he purchased the condo, the property’s value has increased to upward of $1 million.
Facing the prospect of a sale that could be somewhere in the vicinity of twice the $500,000 capital gains tax exclusion for their primary residence and also owing tax on the full amount of capital gains from the condo sale—the exclusion doesn’t apply to second homes—they reconsidered.
“I’m not against paying taxes,” says Cole, age 70. “We live in a terrific country and you have to pay for that privilege. I totally get that. But sometimes, the tax structure is such that it really causes people to think twice before selling—the capital gains [tax] really does cause one to take pause before selling.”
Capital gains tax law is out of sync with surging home values
The bulk of U.S. home sales remain below the cap for the capital gains tax exclusion. Data made available by the Federal Reserve Bank of St. Louis on FRED show that as of the third quarter of 2024, the median home sales price was a little over $420,000 and the average home sales price was a little over $500,000.
But a growing number of home sales are exceeding the cap. The CoreLogic report mentioned earlier notes that some homes have doubled, tripled or even quadrupled in value since they were purchased. This tracks with an observation made by Spencer Carroll, an account executive at Gelt and a certified public accountant.
“I’m based in South Florida, where home prices have doubled, sometimes tripled in the last five years,” Carroll says. “When COVID hit, wealthy individuals from the northeast moved down, driving demand and value.”
The market has gotten so unaffordable, Carroll adds, that some would-be homebuyers have to relocate for a realistic shot at achieving homeownership.
Overall, nearly 8% of homes sold in 2023 exceeded the $500,000 maximum capital gains tax exclusion, according to the CoreLogic report. But that’s not the whole story—when you look at high-cost-of-living areas, overshooting the exclusion amount seems to become a more common occurrence.
CoreLogic notes that at the end of 2023, 28.8% of existing home sales in California showed gross capital gains above $500,000, with Hawaii and Washington, D.C. at 23.8% and 22.1%, respectively. Also in the double digits were Massachusetts at 17.9%, Washington at 15.2%, New York at 13.1%, Colorado at 13%, and New Jersey at 11.7%.
Big tax bills and high interest rates collide
What would your tax bill look like if you exceed the $250,000 exclusion for single filers or the $500,000 exclusion for married couples? Carroll, the Florida-based CPA, breaks it down this way as an example.
“If a homeowner exceeds the exclusion, they face long-term capital gains tax rates of 15%-20%, plus 3.8% net investment income tax for high earners,” he says. “If a couple sells their home with $1 million in gains, $500,000 of that is excluded, and the remaining is taxed at these rates. This results in tax bills of around $95,000-$119,000, which is dependent then on their income bracket.”
Cole, the homeowner in California, notes that if he and his wife sold both their primary home in Beverly Hills and the condo in Los Angeles, they’d be looking at more than a million dollars in capital gains.
It’s a weighty enough topic that he’s discussed it with Noah Damsky, founder and wealth advisor at the Los Angeles-based firm Marina Wealth Advisors. Damsky says another piece to the puzzle the Coles are looking at is the high mortgage rate environment.
“It changes the equation in terms of how much cash you want to bring to the table to buy your next house,” says Damsky. “When rates were [close to] 2.5%, it would have been a different conversation.”
Even when the capital gains tax exclusion isn’t as big a consideration, high rates can be a reason many homeowners will choose to stay put, says Chester Spatt, professor of finance at Carnegie Mellon University's Tepper School of Business.
“After all, most homeowners are reluctant to sell properties with 3% or 4% underlying mortgage loans,” Spatt says.
In fact, CoreLogic data show that around 80% of existing mortgages as of September 2024 carried rates below 5%—meaning a large segment of homeowners have very good reason to think twice before financing a new home or refinancing their existing residence.
The capital gains tax glitch may be tightening housing supply
The growing number of properties that would top the capital gains tax exclusion if sold is one more factor inspiring older homeowners to stay put and not sell. Americans who would otherwise downsize in retirement, for example, are opting to keep their current home, further impairing housing supply.
“There are absolutely some homeowners, especially in high-appreciation markets, who are holding on to their properties to avoid capital gains taxes,” says Carroll.
Some may even decide keeping the home and leaving it to an heir is the smartest financial decision because of something in tax law called the “stepped-up basis,” Carroll notes. Essentially, that means rather than capital gains being calculated based on what the original owner paid at the time of purchase, it’s calculated based on the value of the asset at the time the owner passes away—meaning a lower tax bill if, for example, a home’s value has skyrocketed.
“If the heir sells immediately after inheriting the property, they could avoid capital gains tax altogether,” he says. “So holding on to the family home has become a strategy for passing along family wealth.”
The takeaway
While Cole and his wife may still sell their current residence eventually, as he says they’d like to upgrade to a place with bigger grounds, they’ve decided to keep the condo and let a family member live there. But, if the potential tax bill for selling both properties wasn’t so prohibitive, they might have reached a different conclusion.
“I’m very adamant that turning over property is good public policy,” he says. “Keeping properties in families for decades and generation after generation—that doesn’t really serve anybody.”
