The Capital Gains Tax Squeeze Retirees Can't Ignore: What's Next?

For many retirees, the home they’ve lived in for decades is their single largest asset and a cornerstone of retirement security. Yet rising property values — paired with a capital gains tax rule that hasn’t changed in nearly 30 years — are leaving more older adult homeowners feeling stuck.

The problem: if you sell, the tax bill on decades of appreciation could be massive. If you stay, you may forgo downsizing, relocating, or unlocking substantial home equity to fund retirement.

Part of the dilemma stems from the federal capital gains exclusion on primary home sales.

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Under IRS rules, homeowners can generally exclude $250,000 in profit from federal tax if they are single, or $500,000 if they are married and filing jointly, which is a relatively generous tax break. However, those limits haven’t been updated since they were established in 1997. In that time, home prices in many affluent markets have tripled or more.

As a result, an increasing number of retirees are being hit with capital gains tax bills when they sell their homes. But some lawmakers in Congress want to change that. Here's more to know.

An outdated cap in a changed housing market

If the home sale tax exclusion had kept pace with inflation, today’s caps would be roughly $660,000 for individuals and $1.32 million for couples. Instead, fixed thresholds mean that more sellers face long-term capital gains rates of up to 20% every year.

Don’t forget about the 3.8% Net Investment Income Tax (NIIT) for high earners, and in some places, potentially steep state taxes on gains exceeding those caps.

According to the National Association of Realtors (NAR), nearly one-third of U.S. homeowners — about 29 million people — now have gains on their primary residences that exceed the $250,000/$500,000 exclusion. That share is reportedly projected to rise to more than half of all homeowners by 2030.

Additionally, recent data suggest that approximately 44% of U.S. homeowners are 60 or older, which includes many retirees. The tax burden is especially notable in states like California, Massachusetts, and Colorado, and in neighborhoods that have been transformed by strong demand.

Another concern: More long-time owners facing six-figure tax bills fuels a “lock-in” effect. That effect can cause retirees to hold onto properties they might otherwise sell, which in turn limits housing supply and, in some cases, delays life transitions.

Capital gains tax reform on the way?

Enter the No Tax on Home Sales Act, introduced by Rep. Marjorie Taylor Greene (R-Ga.), which would eliminate federal capital gains taxes on the sale of primary residences.

Greene frames the current tax as “an outdated, unfair burden” that punishes families for building equity. If approved, the bill would:

• Eliminate the existing $250,000/$500,000 limits for primary residence gains
• Apply only to primary homes, not vacation/second homes or investment properties, or house flipping transactions

“Families who work hard, build equity, and sell their homes should not be punished with massive tax bills. The capital gains tax on home sales is an outdated, unfair burden — especially in today’s housing market, where values have skyrocketed. My bill fixes that.” Greene stated in a release regarding the proposal.

Supporters, including President Donald Trump, say the bill would stimulate the housing market by encouraging mobility and enhancing retirement flexibility for older adults with significant unrealized gains. Some critics argue that the benefits would disproportionately favor wealthier homeowners and potentially lead to reduced federal revenue.

During a press briefing, Trump told reporters he was “thinking about eliminating the tax on capital gains from houses,” when asked whether he was considering the proposal to stimulate the market.

Another proposal is floating around Congress. The "More Homes on the Market Act" was reintroduced by Rep. Jimmy Panetta (D-Calif.) in February 2025 with a group of bipartisan cosponsors.

• The act's primary goal would be to double the capital gains exclusion on the sale of a primary residence, increasing it to $500,000 for individuals and $1 million for married couples.
• Supporters argue an update is long overdue, since the current exemption levels were set in 1997 and haven't kept pace with soaring home values.

A rationale behind this bill is that reducing the tax penalty for selling may prompt more homeowners to list their properties.

"Due to outdated limitations on home sale gain exclusions, homeowners who are looking to downsize are discouraged from selling their homes, which can stifle our real estate market and contribute to a lack of housing supply," Rep. Panetta stated in a release regarding the bill.

"Increasing this exclusion through the bipartisan More Homes on the Market Act will make it easier for homeowners to earn more from their investment, which will incentivize them to sell and increase the amount of homes on the market,” he added.

Whether these or other related measures advance in Congress remains to be seen. However, the proposals underscore the importance of homeowners acting strategically under current tax rules.

Home sale gain exclusion: Navigating current law

Section 121 of the Internal Revenue Code generally allows a federal tax exclusion if you’ve owned and lived in the home for at least two of the last five years and haven’t claimed it on another sale within that period. Anything above the threshold is taxable at normal capital gains tax rates.

So, if you’re above the existing thresholds, here are some strategies to consider:

Document Your Basis. Keep records of significant renovations and improvements. These can increase your cost basis (i.e., the original purchase price plus the cost of significant improvements, but not repairs or maintenance) and lower your taxable gain when you sell.

Time Your Sale. The exclusion can be used once every two years. So, carefully spacing sales could shield more total gains from tax.

Coordinate With Income. Avoid selling in a high‑income year that could push you into a higher federal income tax bracket or trigger Medicare IRMAA surcharges.

Integrate Estate Planning. Hold the property until death, which allows heirs a step‑up in basis to fair market value at the date of death. This can reduce or eliminate taxable capital gains for your loved ones if the property is subsequently sold.

Of course, consult a trusted tax or finance professional to devise an approach that makes sense for your situation.

Read More

• No More Capital Gains Tax on Home Sales Coming Soon?
• Capital Gains Tax Exclusion for Homeowners: What to Know
• 2025 Capital Gains Tax Rates for 2025
• More Homeowners Stuck With Capital Gains Tax Bills

Note: This item first appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

This article has been updated to clarify the lifetime estate and gift tax exemption and the tax exemption for life insurance policy loans.