For most retirees, the house is the largest asset outside the retirement account. The tax rule that governs selling it was written in 1997 and has never been adjusted for inflation. That gap is now the subject of an active debate in Washington — and a live planning problem for anyone thinking about downsizing.
What the Rule Actually Says
Under Internal Revenue Code §121, a homeowner can exclude up to $250,000 of gain on the sale of a primary residence, or $500,000 for married couples filing jointly. To qualify, the home must have been your principal residence for at least two of the five years before the sale, and you cannot have used the exclusion on another home within the prior two years.
Those dollar figures were set in 1997 and have never been indexed to inflation. Home prices have not been so restrained.
Critically, the tax applies to gain, not to the sale price. Gain is the sales price minus your adjusted basis — what you paid, plus qualifying improvements, plus certain selling costs. A retiree who bought in 1985 for $95,000 and sells for $700,000 has a gain of roughly $605,000 before adjustments, not a $700,000 windfall.
How Many People Does This Actually Hit?
Here the estimates diverge sharply, and it's worth understanding why.
Research commissioned by the National Association of REALTORS® (unveiled June 9, 2025) found that 34% of homeowners — about 29 million — hold enough equity to exceed the $250,000 cap, and more than 10% (8 million) could exceed $500,000. NAR projects that by 2030 more than 56% of homeowners could pass the $250,000 threshold, rising to nearly 70% by 2035, with over 38% passing $500,000. By 2035, 20 states would have more than 40% of homeowners exposed.
A 2026 analysis from the Tax Policy Center and Brookings Institution reaches a much narrower conclusion: roughly 90% of households age 65 and older would remain within the current exclusion, with about 10% exceeding it. Separately, CoreLogic found about 8% of actual home sales produced gains above the exclusion — more than double the rate of the prior five years.
These are not contradictory so much as different questions. NAR measures potential equity across all homeowners, which is the advocacy case for raising the cap. The TPC/Brookings and CoreLogic figures measure gains on households and sales that actually occur. The honest summary: this is a minority problem today that is growing quickly, and it is concentrated in long-tenured owners in appreciated markets — which describes a great many retirees.
Why Washington Is Talking About It
On August 12, 2026, CNBC reported that administration officials are floating changes ahead of the midterms, with National Economic Council Director Kevin Hassett discussing possible tax breaks. Senators Ted Cruz and Tim Scott have separately asked Treasury Secretary Scott Bessent to index a home's basis to inflation.
In Congress, the bipartisan More Homes on the Market Act (H.R. 1340 / S. 3332) would double the exclusions to $500,000 and $1 million and index them going forward. It has drawn roughly 151 House and 23 Senate supporters but remains in committee.
The argument is about mobility, not just tax. "A capital gains cliff is coming for the middle class, and we have the data to prove it," said Shannon McGahn, NAR Executive Vice President and Chief Advocacy Officer. NAR deputy chief economist Jessica Lautz put the behavioral effect plainly: "Many households are just going to say, 'I don't want to play the musical chairs of moving right now because of capital gains.'"
Practical Takeaways
- Find your basis before you find a realtor. Your gain depends on records most people never kept. Capital improvements — a roof, an addition, a kitchen renovation — increase basis and reduce taxable gain. Routine repairs do not. Old receipts and permits are worth real money here.
- If you are widowed, the two-year window matters enormously. Under §121(b)(4), a surviving spouse may claim the full $500,000 exclusion if the sale closes within two years of the spouse's death, provided the joint-return conditions were met immediately before that date. After two years, the limit drops to $250,000. This is one of the most consequential and least-known deadlines in retirement tax planning.
- Understand the step-up separately from the exclusion. When a spouse dies, the deceased spouse's share of the home generally receives a step-up in basis to fair market value. In community property states the treatment can be more favorable. Combined with §121, this often eliminates the gain entirely on a long-held home — but it is a different mechanism, and it applies whether or not the two-year window is open.
- Confirm the two-of-five-year test if you've already moved. Retirees who relocate to a second home or a care setting before selling can quietly fail the residency test.
- Do not plan around a bill that hasn't passed. Both proposals remain in committee, and experts quoted by CNBC note that any change is unlikely to move quickly. Model your decision on current law; treat a larger exclusion as upside, not as an assumption.
The house may be the single largest position in your retirement plan. It is worth knowing its after-tax value, not just its Zillow value.
Sources: CNBC – Trump officials float cut to capital gains tax on home sales (August 12, 2026); National Association of REALTORS® – Outdated Tax Rules Are Freezing the Housing Market (research unveiled June 9, 2025); NAR – Tax Experts Weigh in on More Homes on the Market Act (H.R. 1340 / S. 3332, 119th Congress); Tax Policy Center / Brookings Institution – 2026 analysis of home-sale gains among households 65+; CoreLogic – share of home sales exceeding the capital gains exclusion; IRC §121 and §121(b)(4); Kiplinger – Downsizing in Retirement: Tax Considerations and Strategies for 2026