Capital Gains Tax Cuts for Home Sales: Will It Fix Housing Affordability?

Capital Gains Tax Adjustments Proposed as Housing Supply Remains Tight

As the U.S. Grapples with a persistent housing shortage, a growing chorus of lawmakers are exploring options to incentivize home sales, including adjustments to capital gains taxes. Sens. Ted Cruz (R-TX) and Tim Scott (R-SC) recently urged Treasury Secretary Scott Bessent to consider reducing capital gains taxes by indexing the original purchase price of an asset to inflation, a move they believe could unlock much-needed housing supply. This proposal arrives alongside other legislative efforts aimed at easing the burden of capital gains taxes on home sales, though experts remain divided on whether these measures will meaningfully address the affordability crisis.

The core of the proposal from Cruz and Scott centers on the concept of “basis adjustment.” Currently, capital gains tax is calculated as the difference between an asset’s purchase price (its basis) and its sale price. By indexing the basis to inflation, the taxable gain would be reduced, potentially lowering the tax bill for homeowners who have held properties for extended periods. The senators argue this could encourage long-time homeowners, particularly those with substantial equity, to list their properties, thereby increasing the available housing stock. The lawmakers detailed their proposal in a letter to Secretary Bessent, a copy of which was reviewed by CNBC.

The Scale of the Housing Gap

The push for tax adjustments comes as the housing supply gap continues to widen. Realtor.com reported an estimated shortage of 4.03 million homes in 2025, up from 3.8 million in 2024. This growing deficit underscores the urgency among policymakers to uncover solutions, though the effectiveness of tax-based approaches remains a point of contention.

Beyond Cruz and Scott: Broader Legislative Efforts

The senators’ proposal isn’t the only one gaining traction in Washington. The “More Homes on the Market Act,” introduced in 2025, proposes to double the existing capital gains exemptions for primary home sales – to $500,000 for single filers and $1 million for married couples filing jointly – and adjust those figures annually for inflation. Currently, these exemption limits have remained unchanged since 1997. The bill is currently stalled in the House Ways and Means Committee.

Further to the right, the Republican Study Committee outlined a more aggressive approach in its “Reconciliation 2.0” framework, suggesting the complete elimination of capital gains tax on properties sold to first-time homebuyers and on sales of rental homes to tenants. Even former President Donald Trump expressed interest in eliminating capital gains taxes on primary home sales last July, following a proposal from Rep. Marjorie Taylor Greene (R-GA). Trump suggested such a move might be unnecessary if the Federal Reserve lowered interest rates.

Who Currently Pays Capital Gains Tax on Home Sales?

As home values have risen, an increasing number of sellers are exceeding the current capital gains exclusion limits. A 2025 report from the National Association of Realtors (NAR) estimated that 34% of homeowners, or 29 million, could exceed the $250,000 exemption for single filers, while 10%, or 8 million, could surpass the $500,000 limit for married couples.

Homeowners whose profits exceed these limits typically pay a capital gains tax of up to 20% on the excess, depending on their overall taxable income. Higher earners may also be subject to an additional 3.8% net investment income tax.

Impact on the Housing Market: Divergent Views

While the need to address housing affordability is widely acknowledged, opinions diverge on whether capital gains tax reform is the right solution. Dozens of conservative and low-tax organizations, including the Market Institute and Americans for Tax Reform, voiced their support for the “More Homes on the Market Act” in a letter to House Speaker Mike Johnson and Senate Majority Leader John Thune, arguing that the current tax burden discourages sales and constricts housing supply.

Adam Michel, director of tax policy studies at the Cato Institute, suggests that expanding capital gains exclusions could “free up some housing stock.” However, other tax policy experts are skeptical.

A February report from Brookings Institution argued that most senior households would not benefit from expanded capital gains exemptions, and therefore the policy would have a limited impact on seller behavior. Howard Gleckman, a nonresident fellow at the Urban-Brookings Tax Policy Center, contends that taxes are a relatively minor factor in older homeowners’ decisions about whether to sell, citing factors like attachment to their homes and community as more significant drivers. “This is going to do next to nothing to solve the supply problem,” Gleckman told CNBC.

Treasury’s Authority and Potential Implementation

Sens. Cruz and Scott are specifically asking Treasury Secretary Bessent to utilize his existing executive authority to index capital gains taxes, rather than pursuing legislative changes. This approach would bypass the need for congressional approval, but its legal standing has been questioned. The Treasury Department has not yet publicly responded to the senators’ letter. The IRS provides detailed information on capital gains taxes on its website.

What’s Next

The immediate next step is a response from Treasury Secretary Bessent to the letter from Sens. Cruz and Scott. The fate of the “More Homes on the Market Act” remains uncertain, dependent on committee consideration and potential floor votes in both the House and Senate. The Republican Study Committee’s proposals are tied to broader reconciliation efforts, which face their own political hurdles. Market participants will be watching for any signals from the Treasury Department regarding its willingness to explore administrative adjustments to capital gains tax rules, as well as further developments in the legislative arena.