Huge Housing Tax Shakeup Coming—Will You Benefit?

The feeling is unmistakable for millions of homeowners across America—being trapped in a property that no longer meets your needs because moving seems financially impossible. Today's perfect storm of record-high home prices combined with elevated mortgage rates has created what economists call the "lock-in effect," leaving countless families feeling financially handcuffed to homes they've outgrown or would otherwise sell.

But a seismic shift might be on the horizon. President Trump has signaled support for completely eliminating the capital gains tax on primary residence sales—a policy change that could dramatically alter the calculus for homeowners considering a move. The current exclusions ($250,000 for singles, $500,000 for married couples) haven't budged since 1997, despite median home prices surging 223% from $126,000 then to over $427,000 today. This disconnect has pushed many long-term homeowners, particularly retirees looking to downsize, into unexpected tax situations they never anticipated when purchasing decades ago.

Who stands to gain most from such a change? The data paints a clear picture: primarily wealthy, long-term homeowners in high-cost regions. Research shows the typical beneficiary would be around 65 years old with a $5.7 million net worth and a $1.4 million home. Nearly 40% of California properties have appreciated beyond the married exemption limit, leading analysts to characterize this as "largely a California story," with similar patterns in other expensive markets like New York, Florida, and Massachusetts. While proponents argue eliminating this tax could unlock housing inventory by encouraging older Americans to sell larger homes without tax penalties, critics counter that it fails to address the fundamental issues freezing the market—persistently high mortgage rates and the critical shortage of affordable housing construction. Some economists even warn that cash-rich downsizers could drive up prices in the starter home segment by competing directly with first-time buyers. As you consider your own housing situation, the question becomes: would this policy help unlock the market for everyone, or primarily benefit those already holding substantial wealth?

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Episode Transcript

Speaker 1 (00:00):
If you're a homeowner you've probably felt it right,
that feeling of being kind oflocked in by today's housing
market.
People are calling it sluggish,frozen, I've even heard
unaffordable.

Speaker 2 (00:13):
Yeah, definitely.

Speaker 1 (00:13):
You feel caught, you know, between these sky high
home prices and then mortgagerates that make moving seem like
well climbing a financialEverest.
It's a huge hurdle moving seemlike well climbing a financial
Everest.
It's a huge hurdle, so for alot of people staying put, even
if maybe the house doesn'treally fit their needs anymore
it just feels like the onlyrealistic option.

Speaker 2 (00:32):
It's a very real thing, this lock-in effect.
It's impacting millions,millions of households all
across the country, Right?
But you know, there's actuallya major discussion happening now
in Washington that coulddramatically change things.

Speaker 1 (00:47):
Yeah.

Speaker 2 (00:47):
Especially for people who own their homes for a long
time.
Okay, you could be on the edgeof a potentially well seismic
shift.

Speaker 1 (00:53):
Absolutely, and that shift comes from President Trump
recently signaling he's lookingat a proposal to completely get
rid of the capital gains taxwhen you sell your main home.

Speaker 2 (01:03):
That's the one.

Speaker 1 (01:04):
So our mission today on this deep dive is really to
unpack what that actually means.
Why is it such a big deal?
And, maybe the most importantquestion, who really benefits
from this?

Speaker 2 (01:15):
Yeah, who wins and who maybe doesn't.
Exactly.

Speaker 1 (01:18):
So we're asking you, listening right now have you
felt that lock-in effect ormaybe someone you know has and
how might a change like this,you know, potentially impact
your own financial freedom oreven just your decision about
whether to move house?
Let's dive in.

Speaker 2 (01:34):
Okay.
So to really get into theimplications, we probably need
to quickly just recap thecurrent rules.
How things work now.

Speaker 1 (01:41):
Good idea.

Speaker 2 (01:42):
So, as a lot of you probably know, when you sell an
asset, like, say, your home, fora profit, that profit is
usually subject to what's calleda capital gains tax.

Speaker 1 (01:52):
Right the tax on your earnings.

Speaker 2 (01:54):
Exactly, but for your primary residence, your main
home, there are actually somepretty big exclusions already in
place.
Okay, currently, if you'resingle, the exclusion is
$250,000 dollars a profit.
That's tax free.
And for married couples formarried couples filing jointly,
it's double that Five hundredthousand dollars.
Anything you make above thoseamounts, that's what gets taxed.

Speaker 1 (02:14):
OK, that seems pretty straightforward, but what's
really striking and you touchedon this is how old this rule is.
Yeah, it was passed way back in1997.
Yeah, it was passed way back in1997.

Speaker 2 (02:23):
1997.
Think about that.

Speaker 1 (02:25):
And if you just look at the median home prices, then
versus today I mean back then itwas around what?
$126,000?

Speaker 2 (02:33):
About that yeah no-transcript.

Speaker 1 (02:38):
It's over $427,000.

Speaker 2 (02:42):
Way over.

Speaker 1 (02:42):
That's a staggering jump, like 223 percent Right.

Speaker 2 (02:46):
That's the number a 223 percent increase.

Speaker 1 (02:48):
Yet those tax exclusion limits the $250K and
$500, they haven't moved an inch.

Speaker 2 (02:53):
Haven't budged.
Stayed exactly the same since97.

Speaker 1 (02:56):
So how has that disconnect, that history
actually played out forhomeowners In the real world?
What's the impact?

Speaker 2 (03:03):
Well, it's kind of incredible when you think about
it, isn't it, that a law fromyou know just over 25 years ago
could now be hitting someonewho's maybe trying to downsize
after 30 years in their familyhome just because of, well,
inflation and how much themarket's gone up.
This law, which was designedfor the, you know, late 90s
housing market, it's nowactively penalizing a growing

(03:25):
number of homeowners.
We're talking about peoplewho've owned for a long time,
maybe retirees looking todownsize or families who need
more space.
Now their profits especially ifthey live in, say, moderately
expensive areas or definitelyhigh cost areas, those profits
can easily shoot past that$500,000 mark now.

Speaker 1 (03:43):
Pushing them into a tax situation they never
expected.

Speaker 2 (03:45):
Exactly A taxable bracket they probably never even
considered when they bought theplace decades ago.

Speaker 1 (03:49):
So OK, given those outdated limits, what are the
actual policy ideas beingfloated now to fix this?
You mentioned the big one totalelimination, like in the no Tax
on Home Sales Act.
From Representative MarjorieTaylor Greene.

Speaker 2 (04:02):
Yeah, that's the sort of the most extreme version
total elimination.

Speaker 1 (04:06):
But even people who maybe aren't keen on getting rid
of it completely, they seem toagree something needs to change.

Speaker 2 (04:13):
Right.

Speaker 1 (04:13):
What are the other ideas out there?
What do they tell us?

Speaker 2 (04:16):
That's a really important point.
Even critics of just wiping itout completely, they recognize
there's an issue here.
Okay, I mean, if you just tookthose original 1997 limits the
$250K and $500K and simplyadjusted them for inflation
since then?

Speaker 1 (04:30):
What would they be now?

Speaker 2 (04:31):
Well, the single filer limit would be around
$506,000.
And for married couples itwould jump to about $1.13
million.
Wow.

Speaker 1 (04:41):
Over a million dollars yeah.

Speaker 2 (04:43):
So that comparison alone really highlights how
inadequate the current caps are.
They're just not really fit forpurpose in today's market.

Speaker 1 (04:53):
It definitely suggests there's a clear feeling
, maybe even a consensus, thatsome kind of adjustment is
really overdue, even if peopledisagree on how much adjustment.

Speaker 2 (05:02):
Precisely the debate isn't so much if there's a
problem, but more about what theright solution is.

Speaker 1 (05:07):
Which brings up a really fascinating question who
exactly are they?
Let's call them the big winners.
If this tax just disappeared,because, like you said, the
benefits wouldn't be spreadevenly at all, would they?
Who really stands to gain themost from such a huge policy
change?

Speaker 2 (05:23):
Yeah, if we connect this back to the data, it's
largely a story about two maingroups homeowners in those
really high cost areas andpeople who've built up
substantial equity over many,many decades.
There was an analysis done forMarketWatch by realtorcom and
they basically called thislargely a California story.

Speaker 1 (05:41):
California.
Okay, why specifically?

Speaker 2 (05:43):
Well, get this.
Nearly 40 percent of homes inCalifornia have appreciated by
more than that five hundredthousand dollar married couple
limit since they were last sold.
Forty percent, that's huge,it's massive.
And other states that would seeyou know significant benefits
follow that pattern Florida, newYork, washington State,
massachusetts places with highproperty values.

Speaker 1 (06:06):
So it's geographically concentrated then
.

Speaker 2 (06:08):
Very much so.
And another stat that kind ofunderscores this in California
nearly 30 percent of recent homesales actually triggered
capital gains taxes 30 percentpaid the tax.
Yeah, which just hammers homehow inadequate those federal
limits are in certain markets.
They just don't reflect thereality on the ground there.

Speaker 1 (06:24):
And you mentioned research from Yale's budget lab
about the typical beneficiary.
That profile was reallyeye-opening, wasn't it?
It's maybe not who you'd firstpicture struggling with a tax
bill.

Speaker 2 (06:34):
Exactly.
It paints a pretty specificpicture.
We're talking about someonewho's typically around, say, 65
years old.

Speaker 1 (06:40):
Okay, ret retirement age.

Speaker 2 (06:41):
Yeah, and their average net worth around $5.7
million.

Speaker 1 (06:46):
Wow Okay.

Speaker 2 (06:47):
And the home itself is typically valued at about
$1.4 million.

Speaker 1 (06:51):
So we're not talking about first-time buyers or
people just getting by.

Speaker 2 (06:55):
Not typically no.
This research really clarifieswho this specific policy change,
total elimination, seemsprimarily designed to help, and
for this particular group,getting rid of that capital
gains tax could mean, you know,saving tens of thousands, maybe
even hundreds of thousands ofdollars in taxes.

Speaker 1 (07:13):
Which could give them that financial freedom, that
push they might need to finallydecide to sell.

Speaker 2 (07:18):
That's the idea.
It's about potentiallyempowering a segment of the
population that's holding quitea bit of wealth tied up in their
homes.

Speaker 1 (07:25):
So OK, let's talk about that central argument.
Then the idea that getting ridof this tax would unlock the
market.
Is that the big promise here?
Could this genuinely fix ourfrozen housing supply problem?

Speaker 2 (07:39):
Well, that's certainly the theory that the
proponents put forward.
That's the main pitch, right?
The idea is that if you removethis tax burden, it would
encourage older Americans,especially those in that profile
we just discussed, to finallysell their larger homes Without,
you know, that potentiallymassive tax bill hanging over
their heads.
The thinking is that more homeswould hit the market and that
you know that potentiallymassive tax bill hanging over

(07:59):
their heads.
The thinking is that more homeswould hit the market and that,
in turn, would help ease thesupply shortage we're all
feeling.

Speaker 1 (08:03):
But hang on a second.
If we've just established itprimarily benefits wealthier
long-term homeowners, aren'tcritics immediately going to
jump on that and say wait, thisis just a tax break for the rich
.

Speaker 2 (08:13):
Absolutely.
That's the immediatecounterargument.

Speaker 1 (08:15):
And that it won't really touch the core issues for
, say, renters or first-timebuyers trying to get into the
market.

Speaker 2 (08:21):
Exactly.
The reality is likely much morecomplicated than that simple
unlocking inventory storysuggests.
Critics are, you know, veryquick to point out that this
policy looks primarily like asignificant tax break benefiting
wealthier homeowners who'vebeen there a long time, right
Renters who make up what over athird of US households.

Speaker 1 (08:43):
Yeah, huge group.

Speaker 2 (08:45):
They wouldn't see any direct benefit.

Speaker 1 (08:47):
Yeah.

Speaker 2 (08:47):
Neither would most first-time buyers trying to
scrape together a down payment.

Speaker 1 (08:51):
And isn't there also a potential kind of unintended
consequence that people worryabout something that could
actually make affordabilityworse for some?

Speaker 2 (09:01):
Yes, that's a big concern.

Speaker 1 (09:03):
Like imagine you have this wave of cash, rich
downsizers right.
They've just sold theirmulti-million dollar homes tax
free.
What if they then turn aroundand enter the market looking for
smaller, maybe more affordable,starter homes?

Speaker 2 (09:16):
Competing directly with first-time buyers.

Speaker 1 (09:18):
Exactly.
Couldn't that actually driveprices up in that segment of the
market, the part that's alreadysuper competitive?

Speaker 2 (09:24):
That's a definite risk that economists point to
you can inadvertently fueldemand and therefore prices at
the lower end of the market.

Speaker 1 (09:32):
It almost feels, I don't know counterintuitive, if
the main goal is supposed to beimproving overall affordability,
doesn't it?

Speaker 2 (09:39):
It does seem a bit sideways to that goal because
fundamentally the biggest thingsdriving that overall lock-in
effect that we started with theyremain the high mortgage rates.

Speaker 1 (09:50):
Still the elegant in the room.

Speaker 2 (09:51):
Absolutely, and just a sheer lack of affordable
housing options across the board, especially new homes being
built.

Speaker 1 (09:58):
Right.

Speaker 2 (09:59):
So, while getting rid of the capital gains tax might
possibly help the margins byencouraging some supply to come
online, it's not a silver bullet.
It doesn't seem like itaddresses those core,
fundamental issues that arereally freezing the broader
market.
For most people it feels like asolution, tackling maybe one
piece of a much larger, muchmore complex puzzle.

Speaker 1 (10:22):
So where does this leave us?
What's next for this wholeproposal?
I mean, the discussion seems tobe just getting started, yeah
it's early days in terms ofactual policy.
And any real change wouldobviously need an act of
Congress.
It's not something that canhappen overnight.

Speaker 2 (10:35):
No, absolutely not.
It requires legislation.

Speaker 1 (10:38):
But I guess the fact that this is even being
seriously talked about, you know, at the highest levels, that
seems significant in itself.
It suggests there's a growingrecognition that the current
system, the 1997 rules, well,they're kind of broken.

Speaker 2 (10:54):
I think that's fair to say, whether the eventual fix
is total elimination of the taxor maybe just that long overdue
adjustment of the limits forinflation we talked about.

Speaker 1 (11:04):
Right Indexing them somehow.

Speaker 2 (11:05):
Yeah, indexing them.
Either way, it feels clear thatthe tax rules around selling
your home just aren't really fitfor purpose anymore in today's
housing market.
This is definitely a debatethat could end up reshaping
personal finance decisions, andcertainly real estate choices,
for potentially years to come.

Speaker 1 (11:20):
So, as we wrap up this deep dive, maybe here's a
final thought for everyonelistening to Mull over OK, if a
central goal for policymakers isgenuinely improving housing
affordability and boostingsupply for everyone, does
focusing so much energy on thecapital gains tax for primary
residences actually address theright problem?

Speaker 2 (11:39):
That's the key question.

Speaker 1 (11:40):
Or, you know, does it risk maybe making other issues
worse, potentially creating newhurdles for people just trying
to get a foothold in the market,like those first time buyers?
It's definitely something tothink about, isn't it?
Especially when you considerthe sort of broader economic
ripple effects that a reallysignificant tax policy change
like this could have.