Trump floats eliminating capital gains tax on home sales. What would that mean?

President Trump on Tuesday floated the possibility of eliminating the federal capital gains tax on home sales, in a move that would change the way real estate profits are taxed for the first time in 30 years.

Speaking to reporters in the Oval Office on Tuesday, Mr. Trump suggested he is weighing supporting legislation introduced by Rep. Marjorie Taylor Greene of Georgia that would nix the existing capital gains tax on home sales. Greene called the tax “an outdated, unfair burden—especially in today’s housing market, where values have skyrocketed.” 

“We’re thinking about that,” Mr. Trump responded to a reporter, when asked how important it is that the capital gains tax be eliminated in order to “unleash” the housing market. “It would also unleash it just by lowering the interest rates,” the president said, adding, “If the fed would lower the rates we wouldn’t even have to do that. But we are thinking about no tax on capital gains on houses.” 

Currently, single-tax filers can exclude up to $250,000 in capital gains from sales of their primary homes from their taxable incomes under what’s called the Section 121 exclusion. That amount rises to $500,000 for joint filers. Both amounts have remained fixed since 1997. 

Reached for comment by CBS MoneyWatch, the White House said it had nothing additional to add to Mr. Trump’s comments.

“Homeowners who have lived in their homes for decades, especially seniors in places where values have surged, shouldn’t be forced to stay put because of an IRS penalty,” Greene said in a statement announcing the proposed No Tax on Home Sales Act. “My bill unlocks that equity, helps fix the housing shortage, and supports long-term financial security for American families.”

According to Research from the National Association of Realtors (NAR), the current federal policy on the capital gains tax on home sales is “quietly distorting the housing market” by “locking in older homeowners, and strangling inventory just when America needs it most.” 

“Stay-put penalty”

A NAR study found that 34% of homeowners, or 29 million Americans, would exceed the $250,000 threshold were they to sell their homes, while 10%, or eight million Americans, would surpass the $500,000 threshold for joint filers. 

As a result, older homeowners are disincentivized to sell their homes, in what NAR researchers refer to as a “stay-put penalty.” For example, seniors who might otherwise consider moving closer to family, or downsizing, are staying in place — and keeping housing inventory tied up. 

“This stagnation in housing turnover is rippling through the entire market, driving up costs and limiting opportunity — exactly the opposite of what public policy should be encouraging,” Shannon McGahn, NAR executive vice president and chief advocacy officer,  said in a statement. “And it grows worse each month.”

Critics say eliminating the tax would only benefit wealthy Americans who can afford to pay tax on gains from home sales that exceed the limit.

Joel Berner, senior economist at Realtor.com, told CBS MoneyWatch that a lot of home sellers already benefit from the $250,000 exclusion limit, and that eliminating the capital gains tax altogether would primarily benefit wealthier Americans who own residences that have appreciated by more than $250,000, or $500,000 in the case of joint filers. 

“It wouldn’t really move the needle for a regular family, unless you have a home that’s appreciated a lot,” Berner told CBS MoneyWatch. “If your home has appreciated by more than $1 million, there would be a benefit to removing the capital gains tax.” 

Inventory release

He also suspects abolishing the capital gains tax on home sales would release inventory onto the housing market. 

“It could be a good thing for the market. In particular where inventory is constrained, it could benefit regular folks,” Berner said. 

By contrast, eliminating the federal tax would also erase revenue paid to the government, and could spark increased interest from investors and speculators, which could also drive up home values. That would contribute to the nation’s housing affordability problem, according to Berner. 

Nearly 27% of all homes sold in the first three months of the year were bought by investors — the highest share in at least five years, according to a report by real estate data provider BatchData.