Could Congress Increase the Capital Gains Tax Exemption for Homeowners? What California Sellers Need to Know

Proposed Capital Gains Tax Changes Could Be a Game Changer for California Homeowners

For nearly 30 years, the federal capital gains tax exclusion for the sale of a primary residence has remained unchanged. While home prices have soared across much of the United States—especially in California—the tax benefit has stayed exactly the same.

Now, several proposals in Congress aim to modernize the tax code by increasing or even eliminating the capital gains tax for qualifying homeowners. If enacted, these changes could encourage more homeowners to sell, improve housing inventory, and reduce one of the biggest financial barriers facing long-term property owners.

Current Capital Gains Tax Rules for Primary Residences

Under current federal law, homeowners may exclude up to:

• $250,000 of capital gains if filing as a single taxpayer.
• $500,000 of capital gains if married filing jointly.

To qualify, you generally must have owned and lived in the home as your primary residence for at least two of the previous five years.

These exclusion amounts were established in 1997 and have never been adjusted for inflation.

Why This Matters More Than Ever

When Congress set the exclusion limits in 1997:

• The median U.S. home price was under $150,000.
• California home values were a fraction of today’s prices.
• Many homeowners never expected to exceed the exemption.

Fast forward to today, and homeowners in markets such as Los Angeles, Orange County, San Diego, San Francisco, and Silicon Valley have often accumulated hundreds of thousands—or even millions—of dollars in appreciation simply by owning their homes for decades.

As a result, many homeowners delay selling because doing so could trigger a significant federal capital gains tax bill.

Economists refer to this as the lock-in effect—when tax consequences discourage homeowners from moving.

Proposed Changes Currently Being Discussed

Several bills have been introduced in Congress that would modernize the existing rules.

1. More Homes on the Market Act

This bipartisan proposal would:

• Increase the exclusion to $500,000 for individuals.
• Increase the exclusion to $1 million for married couples.
• Index the exclusion amounts for inflation going forward.

Supporters believe this would help unlock inventory by encouraging longtime homeowners to sell and downsize.

2. No Tax on Home Sales Act

Another proposal would eliminate federal capital gains taxes on qualifying principal residence sales altogether.

While this represents a much larger change, it has generated considerable discussion among homeowners and the real estate industry.

3. Nest Egg Protection Act

Introduced in 2026, this proposal focuses on homeowners age 65 and older.

Its goal is to help seniors move into homes that better fit their current needs without facing large capital gains tax bills.

Potential Impact on California Real Estate

California homeowners stand to benefit more than almost any other state.

Consider a homeowner who purchased a Los Angeles home in the late 1990s for $400,000.

Today, that same property could easily be worth $2 million or more.

Even after accounting for selling expenses and improvements, the appreciation may exceed today’s $500,000 exclusion for married couples.

Increasing the exemption could:

• Encourage empty nesters to downsize.
• Increase housing inventory.
• Create more opportunities for first-time buyers.
• Improve overall market mobility.
• Reduce the number of homeowners delaying sales solely because of taxes.

What This Means for Buyers and Sellers

If Congress ultimately increases the exemption, many homeowners who have postponed selling may finally decide to list their homes.

For buyers, this could gradually increase available inventory.

For sellers, it could mean significantly greater flexibility in deciding when and where to move.

However, it’s important to remember that none of these proposals has become law. Current federal tax rules remain unchanged.

Frequently Asked Questions

Is the capital gains exemption increasing?

Not yet. Several bills have been introduced, but Congress has not passed any changes.

What is the current capital gains exemption?

The current federal exclusion is:

• $250,000 for single taxpayers
• $500,000 for married couples filing jointly

assuming you meet the ownership and occupancy requirements.

Why hasn’t the exemption changed?

The exclusion was created in 1997 and has never been indexed for inflation, despite dramatic increases in home values across much of the country.

Could these changes affect California homeowners the most?

Many experts believe so because California has experienced some of the nation’s largest home price appreciation over the past three decades. Read more about how the tax affects California here.

Final Thoughts

For homeowners who have owned their homes for many years, proposed changes to the capital gains tax exclusion could represent one of the most significant tax updates in decades.

Whether Congress ultimately doubles the exemption, indexes it for inflation, or adopts a broader reform, the discussion highlights a growing recognition that today’s housing market looks very different than it did in 1997.

If you’re considering selling your home, it may be worthwhile to stay informed about these proposals while continuing to plan based on the current law until any changes are officially enacted.