No Tax on Home Sale Profits: What a $1 Million Exclusion Would Change

The short answer: a big idea with low odds

Could homeowners and landlords soon keep the first $1 million of real estate profit free of federal tax? Right now, no. What exists is a proposal floated on a podcast, not a bill. Housing commentator Graham Stephan walked through the idea in a September video, and his read is that passage before the November midterms is unlikely.

If something like it did become law, the logic is straightforward. Owners sitting on large gains would face less tax friction when selling, more homes could reach the market, and sellers might price a little more aggressively. The size of those effects, though, depends on details nobody has seen: who qualifies, how long the rule lasts, and whether rentals are included.

Here is how the current rule works, what the proposal would change, and what sellers should do in the meantime.

How the current home-sale exclusion works

Under the federal rule commonly called the Section 121 exclusion, a homeowner who sells a primary residence can exclude up to $250,000 of gain from taxable income, or $500,000 for married couples filing jointly. The seller generally must have owned and lived in the home for at least two of the five years before the sale. The IRS explains the rules on its Topic 701 page.

Stephan points out that these limits came from the Taxpayer Relief Act of 1997 and have never been adjusted for inflation. He says home prices have roughly quadrupled since then. His inflation-indexing math is that $500,000 in 1997 dollars would be a little over $1 million today. That is the intuition behind a $1 million cap: it would roughly restore the original purchasing power of the benefit.

His worked example makes the stakes concrete. A couple buys a home for $400,000 in 2005 and sells for $1.4 million, a $1 million gain. They exclude $500,000 and owe tax on the other $500,000, which he puts at about $119,000. That figure implies a combined rate near 23.8%, which is in line with the top federal long-term capital gains rate plus the net investment income tax. Actual bills vary with income, state taxes and adjustments to the cost basis. Under a $1 million exclusion, his example couple would owe nothing.

What the proposal would change

The idea Stephan discusses came from a guest remark on the Dave Ramsey show, which he quotes at length. The speaker said the change could ride in a future budget reconciliation bill, that it would not be permanent, and that the $1 million figure would apply beyond a personal residence to rental properties and vacation homes. The speaker also mentioned a possible executive order. As general context, the home-sale exclusion is written into the tax code, so changing its dollar limits normally requires legislation. Treat any executive-order talk with caution.

Stephan stresses that this is a concept from one speaker, not legislative text. He also notes that related bills already exist. The No Tax on Home Sales Act would remove the dollar cap entirely for a primary residence. The bipartisan More Homes on the Market Act would double the limits to $1 million and index them to inflation. Stephan says both have stalled in Congress, though the latter has 170 co-sponsors. You can check bill status on Congress.gov.

What it could do to listings and prices

The market logic starts with what economists call the lock-in effect: owners with low mortgage rates and big embedded gains often stay put. For a broader look at that dynamic, see our explainer on why the US housing market is frozen as mortgage rates near 7.5%.

Owner-occupied homes

Stephan cites National Association of Realtors figures that 34% of homeowners have gains above $250,000 and about 10% have gains above $500,000. He says those larger gains are concentrated in coastal states and cites California, Washington, Massachusetts, Hawaii and Washington, D.C. His conclusion is that the first homes unlocked would be expensive coastal properties, while most homes already fall under the current limits and would see little change.

Rental properties

This is where his scenario gets large. He says the US has about 49 million rental units, that half carry mortgages below 4%, and that the average owner holds around $300,000 in equity. Those are his figures; the Census Bureau and the NAR research page are the places to check comparable data.

His illustration: a landlord with a $400,000 purchase now worth $800,000 might face roughly $80,000 in tax on a sale, equal to about 40 months of $2,000 monthly profit. Remove the tax, and selling looks much better. He suggests that if just 3% of rental units were listed, about 1.5 million units would reach the market, lifting supply by 25% to 35%, especially in investor-heavy metros such as Las Vegas, Phoenix, Tampa, Atlanta and Dallas.

Treat that as a thought experiment. The 49 million figure likely includes apartments in large buildings that cannot be sold one by one, and the 3% share is an assumption, not a forecast.

Temporary versus permanent

Stephan's timing story: if the benefit is temporary, a first-year rush of listings pushes prices lower, year two stabilizes, and an expiring deadline could trigger a second wave of sellers. He points to a 27% drop in home sales in July 2010, three months after the first-time buyer credit expired, as a precedent for deadline-driven swings. A permanent change would likely produce a smaller, more gradual response.

Who wins and who loses

Stephan's list of likely winners:

• Owners with large gains who were weighing a sale.
• Buyers, who would see more choices and possibly lower asking prices.
• Empty nesters who want to downsize and fund retirement.

His list of likely losers:

• Owners with small gains who must sell into a more crowded market without a tax benefit.
• Renters, because landlords exiting could shrink rental supply and push rents up, while some sellers become renters.

That last point cuts against the simple "more supply, lower prices" story and is worth remembering. Housing is not one market. Sale inventory and rental inventory can move in opposite directions.

How likely is passage?

The mechanism Stephan describes is budget reconciliation, which allows tax and spending measures to pass the Senate with a simple majority instead of 60 votes. The catch is that it must meet deficit limits, which is why he says earlier provisions like no tax on tips and overtime expire after 2028. A capital gains break would likely be temporary for the same reason.

Then the politics. Stephan says Republicans are working on a third reconciliation bill with no tax provisions, that Senate leadership has openly said it does not want to reopen the tax code, and that Congress is largely out in October. He estimates the odds in the "low single digits," which he calls generous. On rentals specifically, he says nothing in Congress addresses it at all.

His realistic scenario is that the idea becomes a campaign promise, or the More Homes on the Market Act gets attached to something else, which he does not expect.

Limits and counterpoints

Stephan says he likes the idea in principle, mainly because indexing the exclusion would correct a decades-old gap, and he expects many sellers to be downsizers who would free up larger homes. He also raises doubts, and a few more are worth adding.

• Who benefits. He cites Yale research that only about 10% of owners have gains above the current limit, with average net worth around $5.7 million for that group. That points to a benefit skewed toward wealthier owners. Note that this 10% differs slightly from the NAR "above $500,000" framing; the thresholds and datasets are not identical.
• Rollover effect. Sellers who keep more of their proceeds may simply buy another home, neutralizing some supply gains. Stephan argues downsizers will dominate, but that is a judgment, not a measured result.
• Price risk beats tax savings. His math: a couple with a $700,000 gain is $200,000 over the limit, for a worst-case tax of about $47,000. A 5% price decline on a $1.2 million home costs $60,000. If a surge of listings cuts prices, waiting for the break could cost more than it saves.
• Supply, not taxes, is the root problem. He argues building more homes is the only lasting fix. Many economists agree that tax changes alone rarely transform affordability.
• Unknown design. Without text on caps, deadlines, depreciation recapture or state tax treatment, every estimate above is speculative.

What this means for you

If you are thinking of selling. Plan around the law that exists today. If your gain is under $250,000 (single) or $500,000 (married), the proposal would change little. If you are well above those limits, a tax professional can model what you would owe and how timing, cost basis and improvements affect it. Delaying a sale in hopes of a law that may never pass carries its own risk, as the price math above shows.

If you are buying. A policy-driven jump in listings, if it ever happened, would most likely show up first in higher-priced coastal markets and investor-heavy metros. Do not count on it. Base your budget on current mortgage rates, which you can track through Freddie Mac's weekly survey, and your own finances. For related supply dynamics, our look at Freddie Mac's "silver tsunami" warning covers how aging owners may release homes over time.

If you are a landlord or own a second home. Today, investment properties do not qualify for the primary-residence exclusion without meeting the two-out-of-five-year use test, and depreciation recapture is a separate tax. Nothing in Congress changes that. Avoid making sale decisions on a podcast remark.

If you are a renter. The possible rent effect is the least certain piece. More sales could bring more owner-occupants and fewer rentals, which could tighten some local rental markets.

What to watch next

Watch for actual bill text in the next reconciliation package, any movement on the More Homes on the Market Act, and committee scoring of deficit costs. Until there is language that includes dollar caps, residency tests and an end date, this remains a discussion topic. The underlying problem, a 1997-era limit applied to a very different housing market, is real. Whether Congress fixes it soon is a different question, and Stephan's answer is probably not.