Eliminate the Capital Gains Exclusion on the Sale of a Principal Residence

A taxpayer who sells an asset is typically required to pay capital gains taxes on the profit from the sale. The Taxpayer Relief Act of 1997 created an exception for taxpayers who sell homes that they have owned and lived in for at least two years, excluding up to $250,000 of gains for single homeowners or $500,000 of gains for married homeowners from the tax.

This option repeals the exclusion, subjecting all capital gains from home sales to capital gains tax. Repealing the exclusion would increase the tax burden on saving and investing in homeowner-occupied housing, and potentially increase the lock-in effect, discouraging some homeowners from selling their homes. The smaller budget deficit resulting from the increase in revenue would reduce federal government borrowing and interest payments to foreigners, resulting in a rise in GNP.

On a conventional basis, this option would decrease the primary deficit by $794.4 billion over the budget window. Long-run GDP would fall by 0.2 percent, while long-run GNP would decline slightly. On a dynamic basis, the primary deficit would decrease by $670.9 billion from 2027 through 2036, $123.5 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would reach 169.8 percent by 2056.

On average, taxpayers would see decreases in their after-tax incomes in 2036 of 0.5 percent. The top quintile of taxpayers would experience a 0.8 percent decrease, whereas the bottom quintile would experience no change. On a long-run dynamic basis, taxpayers would see a 0.6 percent decrease on average.