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Published: December 5, 2025
With rising home values pushing more sellers over today’s outdated capital gains limits, many homeowners are now asking a timely question: will Congress update the home sale exclusion? Lawmakers and policy groups have floated several proposals to modernize the rules, from raising the exclusion to eliminating capital gains taxes on primary home sales altogether.
Understanding these potential changes and why momentum is building behind them is essential for anyone planning a move or approaching retirement.
Key Takeaways
- The Section 121 exclusion allows single filers to exclude $250,000 and married couples $500,000 of gain, but these limits have not been adjusted for inflation since 1997.
- Inflation-adjusted estimates suggest these exclusions would be roughly $505,000 and $1,010,000 in 2025 dollars.
- Federal discussions include eliminating capital gains on home sales, raising the exclusion, or indexing it for inflation.
- Because the limits are frozen, more homeowners in high-cost markets face unexpected capital gains taxes when selling.
Understanding the Current Section 121 Exclusion
Section 121 provides one of the most valuable tax benefits available to homeowners. A single filer may exclude up to $250,000 of gain on the sale of a primary residence, while married couples filing jointly may exclude up to $500,000. These amounts were established in 1997 and have remained fixed ever since, despite major changes in home values nationwide.
The Impact of Inflation on Exclusion Limits
Because the exclusion levels were never indexed to inflation, their real-world value has eroded. Based on broad CPI estimates, the 1997 limits would be roughly $505,000 (single) and $1,010,000 (married) today. That means many ordinary long-term homeowners, particularly in high-cost states, now exceed the current exclusion even though their gains reflect normal market appreciation over nearly three decades.
Consequences of Frozen Thresholds
Homeowners in fast-growing markets often discover too late that the gain on their home exceeds the exclusion. This can create unexpected tax liabilities for retirees planning to downsize, relocate, or free up equity. The mismatch between modern home values and 1997 tax rules is a growing concern for taxpayers and policymakers alike.
Federal Proposals and Ideas for Change
Several ideas have surfaced to modernize the exclusion, though none have been enacted as of late 2025:
- Eliminating Capital Gains Tax on Primary Home Sales: Supporters argue this would reduce lock-in, simplify tax planning, and help retirees access home equity. Critics point to revenue loss and the disproportionate benefit to higher-income households.
- Raising the Exclusion: Updating the $250,000 / $500,000 caps to reflect today’s prices could offer relief in high-cost areas. However, it still leaves questions about how often limits should be updated.
- Indexing the Exclusion to Inflation: This approach adds predictability and prevents future erosion, but it also affects federal revenue forecasts and requires the IRS to update the exclusion annually and provide clear guidance on how each year’s limit applies to home sales.
How Much Federal Revenue Is at Stake?
To understand the scale of these proposals, it helps to look at the revenue involved. Total federal capital gains tax collections from all assets in 2025 are projected to be roughly $260 billion. While I couldn’t find any official data that isolates the share from taxable home sales, I’ve chosen a reasonable assumption that they represent about 5% of total capital gains revenue.
Under that assumption, eliminating capital gains taxes on primary home sales would reduce federal revenue by about $13 billion annually. With total federal receipts near $4.9 trillion, this amounts to roughly 0.27% of federal revenue, a relatively small amount in the context of the overall budget.
How Policy Changes May Affect Housing Supply
One potential advantage of updating the exclusion, whether through higher limits or eliminating the tax for primary homes, is a possible increase in housing supply. Many seniors with fully paid-off homes choose not to move because selling would trigger a significant taxable gain. Reducing that tax burden could encourage more mobility and release more homes back into the market.
A Simple Numerical Example
Suppose you bought a home for $200,000 in 1997 and sell it today for $700,000. Your gain is $500,000. Under current rules, a single filer would exclude $250,000 and owe tax on the remaining $250,000. If the exclusion had been adjusted for inflation to about $505,000, the entire gain would be sheltered. This illustrates how static thresholds can create tax exposure for long-term owners.
Practical Takeaways for Homeowners
Planning ahead matters. Track your home’s basis, including improvements, so you know your true gain at sale time. Stay updated through official IRS guidance ↗. And consider the broader context of your financial plan, such as managing debt or optimizing retirement accounts, to position yourself well if you anticipate a home sale in the coming years.
If you want a deeper walk-through of how taxable gain is calculated, see our guide on how to calculate capital gains on a home sale. For a quick estimate tailored to your numbers, try our interactive capital gains tax calculator.
Conclusion
The home sale exclusion has protected millions of homeowners for more than 25 years, but its static design no longer reflects today’s housing market. Whether proposals to update or reform the exclusion eventually move forward remains uncertain, but understanding the current rules and how inflation erodes them can help you make informed decisions. For retirees and near-retirees, awareness is the first step toward better planning and smoother transitions.