MOOSPEAK: JUL27.2025
A “Bi-Partisan” Tax That Has Outlived Its Era
This week President Trump announced that the administration is looking into eliminating the capital gains tax on residential home sales. Even if the tax break only applies to primary residences, and even if the full capital gain has to be rolled over into a new residence to qualify, it is the right time to bring it back.
Back in the day (from 1951 to 1997) homeowners could defer capital gains tax on the sale of their primary residence if they rolled over the gain by purchasing a new home of equal or greater value within two years before or after the sale, and for us oldies there was a once-in-a-lifetime full exclusion for taxpayers over age 55. Since the Taxpayer Relief Act of 1997, however, single homeowners can only exclude $250,000 in capital gains and marrieds filing jointly $500,000, and only provided they meet the ownership and use tests (owned and lived in the home for at least 2 of the last 5 years before sale).
The Taxpayer Relief Act of 1997 may very well have been the last “bipartisan” tax bill passed in the US. It originated in a Republican-controlled House and Senate elected to fulfill its “Contract With America”, and it was signed by a Democrat President seeking to avoid impeachment over a dalliance with an intern. (It is often said that politics make for strange bedfellows, but in this case, bedfellows also made for strange politics.)
A core objective of the Republican Contract with America was to get the Federal deficit under control while improving the tax situation of the preponderance of Americans. Democrats were concerned with maintaining the social safety net. As a result, the ’97 Act also included a child tax credit, education tax incentives, a cut in the top capital gains tax rate and Roth IRAs. Taking away the residential cap-gains rollover was hardly “Taxpayer Relief” but something had to give in order to pay for all the other bells and whistles. Boomers in their 30’s to 50’s were the largest voting block in the country at the time, and true tax relief was directed at them— their children, schooling, and their investments. It was directed away from folks with significant nominal residential capital gains, oftentimes family farms and estates and seniors with long tenure in their homes. Boomers didn’t care because few had been in their homes long enough to worry about equity gains in excess of the ’97 limits.
Thirty years later, the baby boom is still in the driver’s seat, but the political calculus has changed as Boomers exit their productive years for retirement. More people are leaving the workforce and either want to downsize or have to. Same with aging empty-nesters who may want to move closer to their grandchildren or just seek out better weather, lower taxes, cheaper home prices, or better municipal services. For these voters Trump’s plan to eliminate the capital gains tax on residential home sales could be a huge deal. It would also juice the overall property market, increase the supply of homes, and put more money in sellers’ pockets, making them more open to price negotiation with buyers.
The ’97 Tax “Relief” essentially created a wealth tax that went up every year and masked it with an income tax exclusion that became less valuable every year. It is a common ploy among DC’s tax enthusiasts— a way to raise taxes annually without even mentioning it. The 250K/500K exclusion hasn’t been upped since 1997. Since inflation has whittled the purchasing power of a 2025 Dollar over time down to 50 cents compared to 1997’s greenback, the exclusion would have to double to get it back to its original real level. Moreover, that real estate capital gain everyone is talking about is not so much a function of real estate going up in value as it is of the Dollar’s purchasing power falling.
If you’d bought a house in 1997 for $250,000, you’d be looking at a $500,000 property value in today’s Dollars (and a $250,000 nominal capital gain)— solely due to the decline in the Dollar’s worth over 28 years. The reality would be that there was no change whatsoever in the real estate value, only a collapse in the Dollar, but you’d still be tagged with a “capital gain” (and up against the current residential cap-gains exclusion limit for a single). Government policies create the inflation that weakens the Dollar and creates faux capital gains-- and then they have the nerve to tax us on those “gains”. The President is right politically and economically about eliminating the capital gains tax on residential sales. The sooner the better.
