US Housing Shortage: Capital Gains Tax Impact

Have you ever wondered why finding a home feels like searching for a needle in a haystack? Across the United States, skyrocketing home prices and dwindling inventory have turned the dream of homeownership into a distant mirage for many. I’ve watched friends and family struggle to find affordable homes, and it’s frustrating to see how policy quirks from decades ago still ripple through our lives today. One such quirk—a nearly three-decade-old tax rule—is quietly tightening the screws on the housing market, keeping homes off the market and prices out of reach.

How a 1997 Tax Law Fuels the Housing Crisis

In 1997, a piece of legislation changed the housing landscape in ways few could have predicted. The Taxpayer Relief Act allowed married homeowners to exclude up to $500,000 in capital gains from the sale of their primary residence, with single homeowners capped at $250,000. It sounded like a win at the time—sell your home, pocket some profit, and move on without Uncle Sam taking a big bite. But fast-forward to 2025, and this well-meaning rule has become a double-edged sword.

Back then, the median home price was around $143,000. Today, it’s soared to over $414,000, and in some markets, like San Jose, California, it’s a jaw-dropping $2.02 million. The problem? Those exemption caps haven’t budged in 28 years. For homeowners sitting on properties that have tripled or quadrupled in value, selling means facing a hefty tax bill—sometimes over $1 million. It’s no wonder many are choosing to stay put.

Homeowners are stuck in a tax trap, unable to sell without losing a huge chunk of their profit to taxes.

– Real estate expert in California

The Lock-In Effect: Why Homeowners Won’t Sell

Imagine owning a home you bought for $100,000 thirty years ago, now worth $4 million. Sounds like a dream, right? But here’s the catch: selling could mean a capital gains tax bill that eats away at your nest egg. In high-cost states like California, where the combined federal and state tax rate can hit 37.1%, that’s a massive hit. For older homeowners, especially retirees, this can feel like a financial death sentence.

Many of these homeowners want to downsize or move closer to family, but the tax burden keeps them locked in. I’ve spoken with folks who’d love to trade their sprawling family home for a cozy condo, but the math just doesn’t add up. They’d rather stay put than lose a chunk of their retirement savings to taxes. This creates what experts call the lock-in effect, where homeowners cling to properties they no longer need, shrinking the pool of available homes.

• Fewer homes on the market drive up competition.
• Buyers face higher prices due to low inventory.
• Young families and first-time buyers are squeezed out.

The Ripple Effect on Housing Markets

The housing shortage isn’t just a personal problem—it’s reshaping entire communities. In places like Silicon Valley, inventory has plummeted by over 57% in recent years. With fewer homes available, prices soar, making it nearly impossible for anyone outside of high-earning tech workers to buy. I can’t help but feel for young families stuck in pricey rentals, dreaming of a place to call their own but unable to compete with million-dollar price tags.

This scarcity also impacts local economies. Fewer home sales mean less revenue from transfer taxes and property tax resets, which fund schools, roads, and public services. It’s a vicious cycle: high taxes discourage sales, low inventory drives up prices, and communities lose out on economic activity. In my view, it’s a policy failure that’s been ignored for far too long.

A Tale of Two Markets: California and New York

California’s Silicon Valley is ground zero for this crisis. With median home prices in some areas climbing 667% since 1997, the capital gains tax burden is crushing. A real estate broker I spoke with shared a story of a retired couple who wanted to sell their Palo Alto home, bought for $200,000 in the 1990s, now valued at $3.5 million. Their tax bill would have been nearly $900,000—money they needed for retirement. They stayed put, and the market lost another listing.

New York tells a similar story. In Brooklyn, brownstones that once sold for under $100,000 now fetch $4 million or more. Owners, often empty-nesters, want to downsize, but the tax hit makes it tough. One broker described clients who’d love to move to a condo but can’t stomach the capital gains cost plus high condo maintenance fees. Unlike California, Manhattan has seen an inventory uptick due to new construction, but for classic homes, the lock-in effect persists.

Sellers know their home’s value, but seeing the tax bill makes them rethink everything.

– New York City real estate broker

The Bigger Picture: Who’s Affected Most?

The housing shortage hits hardest at the margins. Young families, first-time buyers, and retirees are all caught in the crossfire. For younger buyers, the lack of inventory means competing with deep-pocketed investors or tech workers who can afford million-dollar homes. For seniors, the tax burden can mean staying in a home that’s too big or too far from loved ones, draining their retirement savings just to stay afloat.

Perhaps the most frustrating part is how this affects mobility. In my experience, moving to a new city or downsizing should be an exciting chapter, not a financial nightmare. Yet, the current tax structure punishes homeowners for making those choices. It’s not just about money—it’s about freedom to live the life you want.

1. Young buyers: Priced out by high costs and low inventory.
2. Retirees: Unable to downsize without massive tax bills.
3. Local economies: Losing revenue from fewer home sales.

A Solution on the Horizon?

There’s hope, though it’s not a done deal. A bipartisan effort in Congress is pushing to update the capital gains exclusion. The proposed More Homes on the Market Act would double the exemption to $1 million for couples and $500,000 for singles. The idea is simple: give homeowners more breathing room to sell without losing their financial security. If passed, this could unlock thousands of homes, easing the housing shortage and cooling prices.

Real estate professionals are rallying behind the bill. A recent study suggests that 34% of homeowners—about 29 million—already face gains exceeding the $250,000 cap for singles, and 10% surpass the $500,000 cap for couples. By 2030, those numbers could climb to 56% and 23%, respectively. Without action, the problem will only worsen.

Updating the tax code could free up homes and make housing affordable again.

– Housing policy advocate

But will Congress act? I’m cautiously optimistic, but history shows that change moves slowly. In the meantime, homeowners are left weighing tough choices, and buyers are stuck scouring a shrinking market.

What Can Be Done Now?

While we wait for legislative fixes, there are ways to navigate the current mess. For homeowners, consulting a tax professional can uncover strategies to minimize capital gains exposure, like timing the sale or exploring deductions. Buyers, meanwhile, might consider less competitive markets or new construction, where inventory is often higher.

Advocacy is another tool. I’ve seen grassroots efforts make a difference in local policy, and this issue needs more voices. Contacting your congressional representative to support the More Homes on the Market Act could push the needle. It’s not just about one home—it’s about building a future where everyone has a shot at homeownership.

• Work with a tax advisor to plan home sales.
• Explore emerging markets with more inventory.
• Advocate for tax reform to unlock the market.

Looking Ahead: A Call to Action

The housing shortage isn’t just a statistic—it’s a crisis reshaping lives. From young couples priced out of their dream home to retirees trapped in houses they no longer need, the impact is real. I believe we’re at a turning point. Updating the capital gains exclusion could breathe life back into the market, but it’s up to us to demand change.

So, what’s next? If you’re feeling the pinch of this broken system, don’t sit idly by. Reach out to your elected officials, share your story, and push for policies that make homeownership accessible again. Together, we can turn the tide on this crisis—one home at a time.

Housing Market Fix:
  50% Policy Reform
  30% Advocacy
  20% Strategic Planning