The Tax Change That Could Unlock the Housing Market in 2026
TL;DR: The More Homes on the Market Act (H.R. 1340) proposes doubling the capital gains exclusion on primary home sales from $250,000 to $500,000 for single filers and from $500,000 to $1 million for married couples, while also indexing those limits for inflation going forward. As of July 2026, this is proposed legislation, not yet law. But if it passes, it could remove a significant financial barrier that has kept many longtime homeowners from selling, freeing up inventory for buyers throughout the market. Contact Peak Capital Mortgage at (970) 577-9200 to discuss what a changing market could mean for your plans.
Key Takeaways
The capital gains exclusion on primary home sales has not been updated since 1997, and home values in many markets have grown well beyond those original limits over the past three decades
The More Homes on the Market Act proposes increasing the exclusion to $500,000 for single filers and $1 million for married couples, and indexing both figures for inflation going forward
As of July 19, 2026, H.R. 1340 has been referred to the House Ways and Means Committee with a Senate companion bill introduced in December 2025. It has not yet become law
Many longtime homeowners may be staying in homes that no longer fit their needs specifically to avoid a large capital gains tax bill, which reduces available inventory for buyers
Even under a higher exclusion, restrictions still apply: the two-of-five-year primary residence requirement remains, and second homes, investment properties, and depreciation recapture are not automatically covered
What Is the Tax Change That Could Unlock the Housing Market?
One of the most significant potential changes in real estate may have nothing to do with mortgage rates, zoning, construction costs, or down payment assistance.
It involves capital gains taxes.
For nearly three decades, homeowners have generally been able to exclude up to $250,000 of gain from the sale of a primary residence when filing individually, or up to $500,000 when married and filing jointly. These limits were established in 1997 and have never been adjusted for inflation.
That may finally be changing.
The bipartisan More Homes on the Market Act proposes increasing the exclusion to $500,000 for single filers and $1 million for married couples filing jointly. It would also index the limits for inflation so homeowners do not find themselves facing the same problem again 20 or 30 years from now.
As of July 19, 2026, this remains proposed legislation and has not become law. The House version, H.R. 1340, was referred to the House Ways and Means Committee, while a companion proposal was introduced in the Senate in December 2025.
Why Are the Current Capital Gains Limits Becoming a Problem for Homeowners?
A $250,000 or $500,000 exclusion sounded substantial in 1997. But consider what has happened to home values since then.
Many homeowners who purchased an ordinary home decades ago are now sitting on hundreds of thousands of dollars in appreciation. These are not necessarily wealthy real estate investors. They may simply be longtime homeowners who bought in a growing community and stayed in the same home for 20, 30, or 40 years.
For some, selling could create a substantial federal capital gains tax liability. That possibility may cause homeowners to postpone downsizing, relocating closer to family, moving into a more accessible home, or selling a property that no longer fits their needs.
Instead, they may decide to keep the property for the remainder of their lives. Property inherited after someone's death generally receives a new tax basis tied to its fair market value at the date of death, although the exact treatment depends on ownership structure, state law, and the estate. That step-up in basis can greatly reduce the taxable gain eventually recognized by heirs.
From an estate-planning perspective, waiting may make sense. From a housing-market perspective, however, it can keep homes off the market.
How Could a Higher Capital Gains Exclusion Increase Housing Inventory?
Supporters believe raising the exclusion would remove one barrier preventing longtime homeowners from selling.
An older couple may be more willing to sell a large family home and purchase something smaller. That larger property could then become available to a growing family. The seller of the smaller home may move somewhere else, creating another transaction.
One listing can create a chain of opportunities throughout the market.
Housing supply is not determined only by how many new homes are constructed. It is also affected by whether existing homeowners are financially comfortable moving. Research from the National Association of Realtors notes that capital gains exposure is spreading beyond traditionally expensive housing markets as long-term appreciation pushes more homeowners toward the existing limits.
What Restrictions Would Still Apply Even Under the New Exclusion?
The proposal would increase the exclusion, but it would not automatically make every home sale tax-free.
Under current rules, the property generally must have been the owner's primary residence for at least two of the five years preceding the sale. The homeowner must also satisfy the ownership requirement, and the exclusion generally cannot be used repeatedly within a two-year period.
Second homes and investment properties do not automatically qualify. Previous rental or business use can also complicate the calculation, and gain attributable to certain depreciation deductions may remain taxable.
It is also important to understand that capital gain is not simply the selling price minus the original purchase price. Qualifying improvements, selling expenses, depreciation, and other adjustments can affect the homeowner's basis and resulting taxable gain. Good records can make a major difference.
What Should Homeowners Do Right Now?
Homeowners should not make a selling decision based on legislation that has not passed. However, anyone who has owned a home for many years should begin organizing purchase documents, receipts for major improvements, prior closing statements, and records of any rental or business use.
Before selling, homeowners should also ask a qualified tax professional to estimate their adjusted basis and potential federal and state tax exposure.
A higher capital gains exclusion could become one of the most consequential real estate tax changes in decades. It could allow longtime homeowners to keep more of the equity they have built while helping more homes return to the market.
That would be good for sellers, good for buyers, and potentially good for the overall health of the housing market.
FAQ
What is the current capital gains exclusion for a home sale? Under current law, homeowners can generally exclude up to $250,000 of gain from a primary residence sale if filing individually, or up to $500,000 if married and filing jointly. These limits have been in place since 1997 and have never been adjusted for inflation. The property must have been your primary residence for at least two of the five years before the sale.
What does the More Homes on the Market Act propose to change? H.R. 1340 proposes doubling the exclusion to $500,000 for single filers and $1 million for married couples and indexing both figures for inflation going forward. As of July 2026, the bill has been referred to the committee and is not yet law. Homeowners should monitor its progress but not make financial decisions based on its passage.
Why would a higher capital gains exclusion add homes to the market? Many longtime homeowners are sitting on significant appreciation but face a large tax bill if they sell. That tax exposure can make staying in place financially preferable to selling, which removes what could otherwise be desirable existing inventory from the market. A higher exclusion could reduce that barrier, encouraging more homeowners to sell and creating a chain of transactions throughout local markets.
The Bottom Line
The capital gains exclusion on home sales has not kept pace with three decades of appreciation, and the More Homes on the Market Act proposes a meaningful correction. If it passes, it could free up significant existing inventory while letting longtime homeowners keep more of the equity they earned. Whether you are a current homeowner evaluating your options or a buyer watching for new inventory, this is a policy worth tracking closely. Ready to think through how a changing market affects your plans? Contact Peak Capital Mortgage to explore your options.
