The Trump administration is reportedly exploring a pair of capital gains tax reforms designed to ease the nation's housing shortage: indexing capital gains for inflation and expanding the existing exemption on home-sale profits. Supporters argue the measures would unlock millions of homes currently held off the market and provide relief to homeowners squeezed by years of inflation.
The proposals come as housing affordability remains a top political concern. Under the Biden administration, median home prices surged by 30 percent, and the median age of a first-time homebuyer reached 40 by 2025. The nation faces an estimated shortfall of nearly 5 million housing units, a crisis many attribute to costly regulations that discourage new construction. While deregulation is a necessary long-term fix, proponents say tax changes could deliver faster relief.
The Lock-In Effect
Current law allows single filers to exclude up to $250,000 in profit from a home sale, and married couples up to $500,000. Those thresholds were set in 1997 and have not been adjusted since, even as the median home price has nearly tripled. Today, 34 percent of homeowners could exceed the $250,000 cap, a figure projected to reach 70 percent by 2035.
This creates a “lock-in effect”: because capital gains taxes are only triggered upon sale, while holding property until death eliminates the tax entirely through the stepped-up basis, many homeowners choose not to sell. That leaves family-sized homes off the market, worsening the supply deficit and locking out younger buyers. Raising the exclusion—or eliminating the tax on home sales altogether—would bring those homes back into the market.
Similarly, indexing capital gains for inflation would reduce the incentive to hold assets longer than economically rational, leading to better capital allocation, increased investment, and stronger growth. But the policy also addresses a fundamental fairness issue: the current system taxes nominal gains, including those that merely reflect inflation. Even an asset whose value lags behind inflation can trigger a tax bill. This “inflation tax” forces Americans to pay more to the government for price increases driven by Washington's own fiscal and monetary policies.
Historical Precedent
Critics are likely to raise two objections: that the tax cuts would reduce government revenue and that they primarily benefit the wealthy. But history suggests otherwise. In 1981, Congress cut the maximum long-term capital gains rate from 28 percent to 20 percent, and capital gains collections more than doubled within four years. After rates were further reduced to 15 percent in 2003, realizations surged 186 percent by 2007.
Moreover, the benefits are not confined to the rich. In high-cost states like Hawaii and California, where failed housing policies have driven prices skyward, 51 percent and 43 percent of homeowners respectively exceed the current cap. These are firefighters, teachers, and police officers who bought homes decades ago—not millionaires.
Next Step in Economic Agenda
The Trump administration has already begun tackling the economic challenges it inherited, notably through the pro-growth provisions in the recent tax legislation. Reforming the capital gains tax is the logical next step. By ending the inflation tax, the administration could accelerate its prosperity agenda, reduce housing costs, and free up capital for investment—every home sold by a longtime owner is one a young family can finally buy.
Michael Faulkender, co-chairman of the America First Policy Institute's Center for American Prosperity and a former deputy Treasury secretary, endorsed the reforms in a recent analysis, calling them “the right move for the economy.”
