End the Biden inflation tax

A Five-Million-Home Gap and the Tax Code That Widens It

Provpnadvice.com – The American housing market is buckling under a deficit of roughly five million units, and the people feeling the squeeze most acutely are young families trying to buy their first home. By 2025, the median age of a first-time homebuyer had climbed to 40, while median home prices had jumped approximately 30 percent in a compressed span of years. Behind those numbers sits a tangled web of causes: costly construction regulations that chill new development, energy mandates that inflate building expenses, and a surge in immigration that strained an already thin rental and sales pipeline. The Biden-era fiscal and monetary posture, which pushed year-over-year inflation past 9 percent — a 40-year peak — compounded every one of those pressures.

Yet one factor that policymakers can address quickly, and that receives far less public discussion than zoning reform or immigration enforcement, is embedded in the tax code itself. The capital gains tax, as currently structured, creates a powerful disincentive for homeowners to sell. And now, with President Trump reportedly weighing reforms that would index capital gains to inflation and potentially exempt residential sales from the levy altogether, the conversation is finally surfacing at the highest level of government.

The Lock-In Mechanism

Under existing law, a single filer may shelter up to $250,000 of profit from the sale of a primary residence, and a married couple filing jointly may shelter $500,000. Congress wrote those figures into statute in 1997 and has left them untouched since. Nearly three decades later, with home values having roughly tripled, the exclusions no longer function as originally intended. Today, an estimated 34 percent of homeowners would blow past the $250,000 threshold if they sold. Projections suggest that share will reach 70 percent by 2035.

The consequence is straightforward arithmetic that most homeowners understand intuitively: sell now and face a meaningful tax bill, or hold the property indefinitely and let the stepped-up basis rule at death erase the gain entirely. For many, the rational choice is simply not to sell. Family-sized houses sit vacant or underutilized, removed from the transaction pool, deepening the very supply shortfall that locks younger buyers out of ownership.

Raising or eliminating the exclusion would pull those homes back onto the market with remarkable speed — far faster than any regulatory reform can deliver new construction. It would simultaneously deliver substantial tax relief to millions of long-term owners who have watched their equity grow while their purchasing power eroded.

The Inflation Tax Nobody Named

Beyond the housing-specific problem, the capital gains framework harbors a deeper distortion. When an asset appreciates, the tax code treats the entire increase as taxable income, even though a meaningful slice of that increase is merely the asset keeping pace with general price levels. In extreme cases, an owner’s asset value can lag behind inflation and the taxpayer still owes a capital gains bill on sale. That is, in substance, a tax on inflation itself — a levy imposed for price increases that Washington engineered through irresponsible fiscal and monetary choices.

The remedy is not novel. The income-tax brackets are already indexed to inflation. Retirement-account contribution limits are indexed. Social Security benefits are indexed. Capital gains remain the conspicuous outlier. Indexing the original acquisition cost to a price index would ensure that taxpayers owe tax only on genuine, real gains above inflation — aligning the treatment of investment income with the rest of the code.

The economic effects extend well beyond the balance sheet. By removing the penalty on holding assets through inflationary episodes, indexing would encourage earlier realization, improve the allocation of capital toward productive investment, and generate additional growth. It would also blunt the lock-in dynamic described above, nudging homeowners toward transactions that replenish the supply pipeline.

Answering the Two Standard Objections

Critics of conservative tax reform typically raise two points: that lower rates “cost” the Treasury revenue, and that the cuts are a handout to the wealthy. Neither withstands close examination.

On revenue, the government collects capital gains tax only at the moment of sale. High statutory rates and the embedded inflation tax suppress sales, shrinking the taxable base. History bears this out. In 1981, after Congress trimmed the maximum long-term capital gains rate from 28 percent to 20 percent, collections more than doubled over the following four years. When rates were cut again to 15 percent in 2003, realization rates surged 186 percent by 2007. Lower rates expanded the base enough to more than offset the rate reduction.

On distribution, the framing of a “giveaway to the rich” ignores who actually benefits. The homeowners most affected by the lock-in effect are not hedge-fund managers; they are long-tenured, middle-class families whose primary asset is the house they have lived in for two or three decades. Inflation has eroded their real income while their home equity has nominally ballooned. Removing the tax on that sale is, for them, a correction of a distortion that has quietly taxed their savings without their consent.

The calculus for homeowners facing the current exclusion becomes simple: don’t sell. The result is family-sized homes sitting off the market, contributing to the housing supply deficit that leaves young Americans locked out of homeownership.

Whether the final package takes the form of a full residential-sale exemption, a substantially higher exclusion, or inflation indexing of the acquisition cost, the direction of travel is clear. The tax code, as written since 1997, is a structural contributor to the housing shortage. Correcting that contribution would be among the fastest, cheapest, and most broadly shared policy levers available to put homes back on the market and put young families back in the driver’s seat of the American Dream.