When I talk to a potential seller of a property we have to discuss the potential tax consequences. An investment property can use 1031 Exchanges to defer taxes and use the proceeds to upgrade or diversify their real estate holdings. With an owner occupied residence the sale incorporates a limited Capital Gain Exemption.
Back in 1997, Congress enacted what was then one of the most homeowner friendly tax provisions in modern history: the exclusion of capital gains on the sale of a principal residence. Married couples filing jointly could shield up to $500,000 of profit from taxation, while individuals could only exclude $250,000. This eliminated the old reinvestment requirement, and gave sellers tremendous flexibility proceeds that could be used for a new home, a second property, or even non-real-estate investments.
But here’s the problem, those numbers were never indexed for inflation. Nearly three decades later, with home values having appreciated significantly, the thresholds are badly outdated. Had the exclusion kept pace with inflation, today’s numbers would be closer to double their current limits. If the caps were indexed to house price growth, they would now be $885,000/$1,775,000. If indexed to consumer price inflation, they would be $500,000/$1,000,000. Instead, longtime owners who’ve seen strong appreciation are frequently facing unexpected tax burdens when they sell.
Inflation vs. True Capital Gains
It’s important to recognize that not all price appreciation represents a true “gain.” A large portion of today’s higher home values is simply the result of inflation, the rise in costs over time. For example, if you bought a Los Angeles home for $400,000 in the late 1990s, basic inflation alone could put that property’s value well over $800,000 today, even before considering location demand, improvements, or market growth.
The issue is that the tax code treats this entire increase as taxable capital gain once it exceeds the $250,000/$500,000 exclusion. That means homeowners may be taxed not on real wealth creation, but on inflation driven price adjustments. Without indexing the exclusion to inflation, sellers are essentially penalized for holding onto a home long term, even though their “profit” may not represent an actual improvement in buying power.
Example Scenario: Single Homeowner in the San Fernando Valley
Let’s say an individual bought a home in the Valley 25 years ago for $250,000.
Today’s value (2025): $1,250,000 (based on 6% annual appreciation, very realistic for LA over that span).
Adjusted basis: $250,000
Total gain: $1,000,000
Since this is a single filer, only $250,000 of that gain is excluded.
Taxable gain: $750,000
Assuming a combined federal + state capital gains tax rate of 25%, that’s a $187,500 tax bill.
*Here’s the kicker: if you strip out the inflation component, a huge portion of that $1M “gain” is not really a gain in purchasing power, it’s just the dollar losing value! Yet under today’s frozen exclusion limits, the IRS still taxes it as if it were profit.
The Local Impact in Los Angeles or Ventura County Regions
In high cost regions like Los Angeles, this hits particularly hard. It’s not unusual for even modest homes to appreciate well beyond the $500,000 exclusion over a 20 or 30 year ownership period. That means many older homeowners who’d like to downsize, relocate, or cash out as part of their retirement strategy are holding back. The result… fewer listings, tighter inventory, and more frustration for both buyers and sellers.
Another real world impact is when aging parents need to move into a care facility and the family must sell the home to cover long term care costs. I’ve seen in too many cases, the outdated capital gains exclusion means a large portion of the sale proceeds is lost to taxes, instead of being available for critical healthcare and housing expenses. Families are then forced into tough choices… either sell now and sacrifice funds needed for care, or delay the sale until after the parents pass, just to take advantage of the stepped up tax basis. Neither option truly serves the best interest of the homeowner or their family.
There are two new bills in Congress that aim to fix this:
The More Homes on the Market Act (H.R. 1321) – Would double the exclusion levels and index them to inflation. This good. It has Bipartisan support and so far has 87 Co-Sponsors from both parties.
The No Tax on Home Sales Act (H.R. 4327) – A newer proposal, and would eliminate all Capital Gains Taxes from the sale of a residence. Trump says he’d consider signing it, but it has limited support with presently only 1 Co-Sponsor.
A significant increase in the exclusion amount would directly free up long tenured homeowners to finally sell without fear of being hit with a six figure tax bill.
Why This Matters Locally
Back in the 1990’ homeownership tenure was around 6-7 years. In 2025 it’s over 13 years. In the Los Angeles market, where median home prices are well above the national average, this adjustment would be a game changer. It would encourage mobility for retirees, open up much needed inventory for move-up buyers, and create more opportunities for younger families looking to enter the market.
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free to contact me
Ron Henderson GRI, SRES, SFR, RECS, CIAS, CREN, GREEN
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – Southland Regional Association of Realtors (2025)
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
DRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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