America’s home equity tax was only meant for the rich — but hasn’t been tweaked since 1997. Now US seniors are getting hurt. Is that fair or foul?

These exclusion limits were set in 1997, when far fewer homeowners saw gains of this size. Since then, home values have increased significantly, but the thresholds have not been adjusted for inflation.

As a result, more homeowners, particularly retirees and long-term owners, are exceeding the exemption limits and facing tax bills that were once rare. This has reignited debate over the fairness of the policy.

Understanding how capital gains tax is calculated — and how it may affect your finances and the broader market — is essential.

Understanding home equity taxes

If you own assets like property, stocks, or cryptocurrency, you’re likely familiar with how capital gains taxes work. But homeowners who have lived in their primary residence for at least two of the last five years before selling receive a special tax break.

This break applies to the profit from the sale — not the full sale price. For example, if you and your partner bought a home for $250,000 and later sold it for $750,000, your capital gain would be $500,000. As a married couple filing jointly, that entire amount would be excluded from capital gains tax under current IRS rules. That’s a whopping 200% gain, completely tax-free.

Given that the median U.S. home sale price is $410,800, according to data from the Federal Reserve, many middle-class homeowners still fall under the exemption limits. However, the sharp rise in home prices over the past 30 years means more owners are now exceeding those limits and facing unexpected tax bills.

According to data from Realtor.com, home values have increased approximately 260% since 1997 — a trend that has particularly affected older homeowners who’ve held onto their properties for decades. In response, some lawmakers have proposed updating the exemption threshold.

Time for a change?

Some lawmakers are already pushing to eliminate capital gains taxes on home sales. In July, U.S. Rep. Marjorie Taylor Greene introduced the No Tax on Home Sales Act, which would exempt all primary residences from capital gains taxes, regardless of the size of the gain. President Donald Trump, a billionaire real estate investor, has voiced his support for the bill.

However, an analysis by the Yale Budget Lab using Federal Reserve data found that “only a small fraction of homeowners would benefit” from eliminating the tax. As of 2022, only about 10% of U.S. households had capital gains exceeding the current exemption limits. The National Association of Realtors estimates the figure at 15%.

The average net worth of this cohort is $5.7 million, according to Yale Budget Lab. In other words, while the tax initially targeted the ultra-wealthy in 1997, today it primarily affects upper-income homeowners. If you’re among them, there are still ways to reduce your exposure.

What can you do?

Even wealthy homeowners with sizable capital gains on their primary residence can reduce their potential tax liability. For example, if you’re married, filing jointly allows you to claim the full $500,000 exemption on the home you share. If you’re engaged, it may be worth waiting to sell until after you get married and can file jointly.

It’s also important to calculate your capital gains accurately. The IRS allows you to include the cost of capital improvements — such as replacing the roof, upgrading the HVAC system, or remodeling bathrooms — in your home’s adjusted cost basis. This reduces the taxable gain when you sell. Be sure to keep all receipts and documentation related to these improvements.