The median home price in 1997 was around $127,000. That's the year Congress set the Section 121 exclusion at $250,000 for single filers and $500,000 for married couples. Those thresholds have never been adjusted.
If they had been indexed to inflation, they'd be closer to $450,000–$500,000 and $900,000–$1,000,000 today, depending on the measure. A bipartisan bill in Congress, the More Homes on the Market Act, would double the exclusion and index it going forward.
The bill is still in committee and faces long odds.
But the gap it's trying to close keeps getting wider. the National Association of Realtors estimates roughly one-third of homeowners already exceed the current single-filer cap, with that share projected to grow over the next decade.
In California and New York, a couple who bought in the Bay Area or Westchester 20 years ago could easily be sitting on $1.5M or more in appreciation. Under current rules, roughly $1M of that gain could be taxable.
For top earners in those states, combined federal and state tax on long-term gains can exceed 30%, though the exact rate depends on income. Capital improvements increase your basis and reduce the taxable gain, but for long-hold properties in these markets, the gap is usually still large.
That tax exposure is one reason homeowners delay downsizing, relocating, or moving to assisted living. It reduces inventory, keeps prices elevated, and locks up housing stock.
To qualify for the full exclusion, you need to have owned and lived in the home for at least two of the last five years. Partial exclusions are available in some cases, like a job relocation or health-related move.
Whether this bill advances or not, the current exclusion is the one to plan around.
For educational purposes only. Not tax, legal, or investment advice.