Bill To Double Capital Gains Tax Exclusion Picks Up Momentum in Congress

A bill to double the capital gains tax exclusion to curtail the penalty on home sellers is gaining traction in Washington, DC.

The More Homes on the Market Act has attracted four additional co-sponsors before both chambers adjourned for the August recess.

Three Democrats in the House threw their support behind the bill: Ryan Patrick of New York and Doris Matsui and Lateefah Simon of California. In the Senate, Republican David McCormick of Pennsylvania also co-sponsored the bill.

There are now 151 House members and 23 Senators who support the bill. That includes 1 in 3 of the 435 voting members, plus several nonvoting members. The two versions are almost identical, except for one provision that relates to how to index the exclusion to inflation. Both chambers would need to agree on a final version of the bill.

The National Association of Realtors® also champions the bill to change the tax scheme, because it could allow more people to sell their homes without incurring a punishing tax bill.

Kevin Brown, president of NAR, lobbied for the law as he spoke to a panel in Congress in June. He and other NAR leaders argue the bill should be a major priority as both parties target an affordability message ahead of the midterms.

They also believe it's possible given the recent passage of the bipartisan housing reform package, the 21st Century Road to Housing Act. That bill's 50 provisions are aimed to cut red tape.

"Just like people were locked into their homes at lower interest rates, seniors are often locked in because of the home equity penalty," Brown said. "This legislation expands existing housing stock and gives seniors the opportunity to tap equity that they have counted on for retirement."

Capital gains tax exclusion unchanged since 1997

The current code, set in 1997, taxes profits from home sales at up to 20%, if they exceed the limit of $250,000 for single people and $500,000 for joint filers.

Because the capital gains tax exclusion wasn't tied to inflation, many more homeowners today face a tax hit than they would have three decades ago. Typically, the longer they own the home, the larger the bill.

The bill would double the current exclusion limits to $500,000 for single filers and $1 million for married couples filing jointly, while indexing both thresholds to inflation going forward.

NAR has estimated that nearly 13 million homeowners would face a tax penalty if they sold their homes today. Brown argued that raising the exclusion limits would help free up housing inventory at a time when the country is facing a major supply crunch.

"There are people on the sidelines right now, just waiting, because they either don't want to pay their tax or can't afford to pay a tax," Brown testified in June.

Last year, Realtor.com® reported that 1 in 3 homeowners now has more equity than the exclusion threshold protects for single filers. That exposes many families to a potential capital gains tax penalty upon the sale of their primary residence.

While support from such a sizable portion of Congress might signal hope for the bill, it still faces hurdles in a gridlocked Congress.

The potential cost to the government remains its biggest challenge. Rep. Jimmy Panetta (D-CA), who introduced the House version, acknowledged as much.

A congressional analysis from last year estimated such a change could deprive the government of $46.4 billion in tax revenue. Even a more targeted approach, like raising the exclusion only for people over 55, still costs $4.9 billion.