Tip: How to Encourage the Sale of More Homes—Tax Holiday

Some years ago, we faced issues in the US market that there were not enough houses available for sale.

Certainly, even with somewhat reduced interest rates, this same concern with a lack of affordable housing is present in the US market.

Today, many homeowners seem hesitant to list their home for sale.  Why?  We all know that there are issues with timing, costs of sale, costs to relocate, problems with locating the desirable replacement home, interest rates, tax payments, downpayments, monthly costs, tax issues, and much more.

Some of the above concerns will be addressed as the market changes.  However, as to the tax issue, where a sale might generate a substantial taxable gain to the seller, this should and can be easily addressed by Congress.

Most homeowners have heard of the exclusion that can apply to gain that is generated when a homeowner sells the principal residence.  If the homeowner/taxpayer can show that certain tax requirements are met, all or part of the gain may be excluded from taxable income.  (This point is noted later in this Tip.)

The essence of the requirements to avoid all or part of the tax on the gain from the sale of the home is that the home being sold must be the principal residence of the homeowner/taxpayer for 2 of the last 5 years.  There are other requirements, but the key is normally to show the 2 year requirement is met in residency as the principal residence. 

If these tax requirements are met, generally speaking, the taxpayer/homeowner can exclude up to $250,000 worth of gain on the sale if the homeowner is filing a separate return.  If the homeowners are filing a joint return, the exclusion can be up to $500,000.

For many years the National Association of Realtors (NAR) and other groups, such as homebuilders, have advocated that the exclusions should be increased as they have not been adjusted for many years.

(We have advocated for this same position via many tax groups.) 

What do you think the housing market would look like if the exclusions were doubled?  That is, if the exclusion for a qualified single taxpayer filing for the sale of a home could exclude up to $500,000, with the joint qualified filers being allowed an exclusion of up to 1 million?! 

In such instance, it is likely that taxpayers holding homes that have substantially appreciated would place their home on the market for sale, resulting in a huge increase in inventory available for sale.  And, sellers might even be more flexible to reduce their pricing, if they had no or a much smaller federal income tax burden from the sale of their home.

How about another, but related suggestion? 

If the government really wants to place more homes on the market, allowing more folks to purchase such homes, which in turn would stimulate other related markets, e.g., financing, brokerage, building of homes, sale of land for homebuilding, sale of appliances, and all the items related to the sale and purchase of homes, here is a thought.  Provide for a Tax Holiday as to any (or part) of the capital gain generated from the sale of a principal residence during 2026 (or for more years). 

The requirements for a seller to gain exclusion of the gain from the sale of the home would be the same as noted above.  (These requirements come from the Internal Revenue Code under 26 USCA Section 121.  For more on this issue, see Levine, Mark Lee and Segev, Libbi Levine, Real Estate Transactions, Tax Planning, Chapter 28, Thomson/Reuters/West 2026.)

Can you imagine how many homeowners would move quickly to place their homes for sale, if the gain from the sale would be excluded?! And, with the funds from the sale of these homes, other properties would sell and some of these funds would find themselves placed in other markets, be that the stock market, start up companies, or many other opportunities. 

This approach for the Tax Holiday would free billions of dollars to move within various markets, real estate and others.

Just a thought…

Dr Mark Lee Levine, Professor, University of Denver