President Trump is considering new reforms on capital gains tax. These include indexing capital gains for inflation and exempting more home sales from the tax. The goal is to boost the economy, particularly in housing affordability.
Americans, especially young ones, are concerned about housing costs. Under the Biden administration, inflation soared due to excessive spending. Energy mandates increased homebuilding costs. Illegal immigration strained the housing supply.
Home prices jumped 30%, and by 2025, first-time homebuyers reached an average age of 40. The market lacks about 5 million housing units, largely due to regulations that hinder construction. While deregulation might lower prices, changes take time. Exempting home sales from capital gains tax could quickly increase supply and offer tax relief.
Currently, individual filers can exclude up to $250,000 from a home sale, and married couples can exclude $500,000. These thresholds, set in 1997, haven’t changed. Home prices have nearly tripled since then. 34% of homeowners now exceed the $250,000 cap. By 2035, that number could reach 70%.
This encourages homeowners to hold their properties instead of selling, limiting market supply. Raising the exclusion or removing the home sale tax could release more homes to the market. Indexing capital gains for inflation would prevent long-term holding of assets, leading to better capital allocation and economic growth.
The current tax system taxes asset value increases without accounting for inflation. This means even if an asset value grows slower than inflation, taxes are still due. As inflation soared during the Biden years, reaching over 9%, Americans faced steep burdens on asset holdings.
The solution is to index the purchase price for inflation, ensuring taxes apply to real gains. Other tax code areas, such as income tax brackets and Social Security benefits, already index for inflation. Capital gains should follow.
Critics argue tax cuts reduce government revenue and benefit the wealthy. However, the government profits from capital gains taxes when assets sell; high rates discourage sales and thus reduce revenue.
In 1981, reducing the maximum long-term capital gains rate from 28% to 20% doubled collections in four years. In 2003, further reduction to 15% led to a 186% increase by 2007. The policy provides tax relief to ordinary Americans like firefighters, teachers, and police officers.
In high-cost states such as Hawaii and California, many homeowners exceed current caps. The policy doesn’t favor the rich. Selling older homes frees them for young families. Pro-growth tax measures have marked Trump’s administration. Reforming capital gains tax fits the agenda of economic prosperity.
This analysis is by Michael Faulkender, co-chairman of the America First Policy Institute’s Center for American Prosperity and former deputy Treasury secretary.