President Trump is reportedly considering reforms to the capital gains tax. The plans include indexing capital gains for inflation and exempting more home sales from the tax entirely. These changes aim to stimulate the economy and address housing affordability concerns.
Americans, especially younger generations, worry about the rising cost of housing. Critics argue that the policies of the Biden administration negatively impacted the American Dream. High spending contributed to inflation, energy mandates increased building costs, and illegal immigration strained housing supply. These factors led to a 30 percent surge in median home prices, with the median first-time homebuyer age reaching 40 by 2025. The shortage of nearly 5 million housing units compounds the issue.
Regulations often hinder new construction, and while deregulation could decrease prices, it would take time. Eliminating the capital gains tax on home sales could quickly increase housing supply and offer tax relief to homeowners. The current tax code allows individuals to exclude up to $250,000 in profit from a home sale, and married couples can exclude $500,000. These amounts have not changed since 1997, even though median home prices have nearly tripled. By 2035, 70 percent of homeowners might exceed the $250,000 cap, which discourages selling. This situation keeps family-sized homes off the market and limits young Americans’ access to homeownership.
Increasing the exclusion or removing the tax on home sales could return these homes to the market quickly. Indexing capital gains for inflation could also encourage asset sales, leading to better capital allocation, new investments, and economic growth. It addresses flaws in the tax system, wherein individuals are taxed on asset value increases that inflation causes. Proper indexing would mean taxes are only paid on real gains. Other areas of the tax code already adjust for inflation, such as income tax brackets, retirement contribution caps, and Social Security benefits. It’s time for capital gains to follow suit.
Opponents of conservative tax policies typically claim that tax cuts reduce government revenue and benefit the wealthy. Historically, high capital gains taxes have discouraged sales, thus decreasing revenue. Following rate cuts, such as those in 1981 and 2003, capital gains collections increased significantly. This proposal aims to help citizens burdened by inflation, including long-time homeowners like firefighters, teachers, and police officers. Areas with high living costs, such as Hawaii and California, have many homeowners exceeding the current cap.
The Trump administration’s pursuit of pro-growth tax policies signals a commitment to cleaning up economic challenges. Reforming the capital gains tax would align with their agenda, reducing housing costs and stimulating growth by freeing capital.
The author, Michael Faulkender, is co-chairman of the America First Policy Institute’s Center for American Prosperity and served as deputy Treasury secretary.