For more than 50 years, capital gains on sales of taxpayers' homes have been preferentially treated. A revision in 1997 replaced two longstanding provisions—a provision allowing capital gains tax deferral when a new residence is purchased and a one time exclusion of $125,000 of capital gains for sellers over age 55—with a capped exclusion for each sale. While the 1997 cap was higher than the previous cap for the over-age-55 sellers, it was less generous than the uncapped rollover provision it replaced. In addition, the dollar cap was not indexed for price changes, and, unlike the previous over-age-55 cap, was half as large for unmarried taxpayers—$500,000 for married couples and $250,000 for single taxpayers. Two bills in the 109 th Congress addressed this provision. H.R. 2127 , introduced by Representative Filner, would have allowed taxpayers over the age of 50 to exclude an amount that is double the current cap, but it is available only once in their lifetime. Other legislation ( H.R. 3803 by Representative McCarthy and S. 4075 by Senator Schumer) was introduced to change the amount of the exclusion for surviving spouses to that of a married couple. In the 110 th Congress, S. 138 was introduced to allow a surviving spouse to exclude up to $500,000 of gain from the sale or exchange of a principal residence owned jointly with a deceased spouse if the sale or exchange occurs within two years of the death of the spouse. That provision was also included in H.R. This report examines the capital gains exclusion and the ceiling. The capital gains exclusion, however, was not indexed for inflation, or for housing price changes. Eliminating the Ceilings

One policy option could be to remove the ceilings altogether. H.R. 3648 , the Mortgage Forgiveness Debt Relief Act of 2007, which became public law ( P.L. 110-142 ) on December 20, 2007. Changing the Structure of the Exclusion

Another option is to change the structure of the exclusion in general. Capital gains taxes on homes create barriers to labor mobility in the economy. Imposing capital gains taxes on homes also creates significant compliance costs, requiring individuals to keep records for decades and to make fine distinctions between improvements and repairs. Capital gains taxes also tend to distort housing choices, discouraging individuals from selling their homes because of changing family and health circumstances. The taxation of gains in excess of a cap creates inequities between homeowners with different job circumstances, between those living in different parts of the country, and between those with different health outcomes. Exclusions of gains on homes do, however, contribute to tax avoidance schemes, especially ones that allow gains on investment properties to escape tax. The exclusion from capital gains tax for owner-occupied housing currently exempts most homeowners from the tax.
For more than 50 years, capital gains on sales of taxpayers' homes have been preferentially treated. A revision in 1997 replaced two longstanding provisions—a provision allowing capital gains tax deferral when a new residence was purchased, and a provision allowing a one-time exclusion of $125,000 for sellers over age 55—with a capped exclusion for each sale. While the cap adopted in 1997 was higher than the cap for the over-age-55 sellers, it was less generous than the uncapped rollover provision. In addition, the dollar cap was not indexed for price changes, and, unlike the previous over-age-55 cap, was half as large for unmarried taxpayers—$500,000 for married couples and $250,000 for single taxpayers.
Two factors in recent years, the rapid rise in housing prices and interest in tax reform, suggest the capital gains exclusion, including the dollar cap, might be reconsidered. In the 109th Congress, two bills were introduced to address this issue. H.R. 2127 would have allowed taxpayers over the age of 50 to double the current exclusion, once in their lifetime. H.R. 2757 would have indexed the exclusion to price changes. Other legislation (H.R. 3803 and S. 4075) was introduced to change the amount of the exclusion for surviving spouses to that of a married couple. In the 110th Congress, S. 138 was introduced to allow a surviving spouse to exclude up to $500,000 of gain from the sale or exchange of a principal residence owned jointly with a deceased spouse if the sale or exchange occurs within two years of the death of the spouse. That provision was also included in H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, which became public law (P.L. 110-142) on December 20, 2007.
Some criticisms have been made that there are significant tax benefits for owner-occupied housing. Capital gains treatment is one of those benefits. Yet, there is an efficiency argument for eliminating or excluding a large portion of the gain on homes from tax. Capital gains taxes on homes create barriers to labor mobility in the economy. Imposing capital gains taxes on homes also creates significant compliance costs, requiring individuals to keep records for decades and to make fine distinctions between improvements and repairs. Capital gains taxes also tend to distort housing choices, discouraging individuals from selling their homes because of changing family and health circumstances. And, while the exclusion favors homeowners relative to renters, the taxation of gains in excess of a cap creates inequities between homeowners with different job circumstances, between those living in different parts of the country, and between those with different health outcomes. Exclusions of gains on homes do, however, contribute to tax avoidance schemes, especially ones that allow gains on investment properties to escape tax.
The current treatment of capital gains could be maintained. However, some consideration might be given to changing the dollar ceiling. One option is to eliminate the ceiling. Another option is to adjust the ceiling. This report examines the capital gains exclusion and the ceiling and will be updated to reflect legislative developments.