From left, Steve and Hans Wydler
For years as luxury real-estate brokers in the DMV (D.C., Maryland, Virginia), we’ve watched a stubborn trend erode housing mobility: Long-time homeowners are increasingly choosing not to sell. It is not because they don’t want to, but because the U.S. tax code penalizes them for doing so.
Under current law, individuals may exclude up to $250,000 of capital gains on the sale of a primary residence, and married couples up to $500,000. Gains above those figures are taxed at long-term capital gains rates, up to 20% at the federal level, plus applicable state and local taxes. The $250k/$500k exclusion limits were set in 1997 and have never been indexed for inflation, even as home values have skyrocketed.
The capital gains exclusion limits have created a “lock-in effect” for millions of seniors and other long-time homeowners, particularly those in high-value markets. Recent National Association of Realtors® research suggests that 34% of homeowners today (29M) could already exceed the $250k capital gains exclusion for single filers, and 10% (8M) have potential gains above the $500k threshold for married couples.
This is not a fringe phenomenon. The U.S. population is aging rapidly. More than 60 million Americans are now aged 65 and older, with that number growing each year.
Many of these homeowners have built up significant equity simply by living in their homes for decades. According to an analysis by Transamerica Center for Retirement Studies in 2025, one in five retirees (22%) had $500,000 or more in home equity.
At the same time, heirs stand to benefit from a step-up in tax basis at death. Under current law, heirs generally receive a step-up in tax basis at death, meaning accumulated capital gains on a home are effectively erased. This benefit applies regardless of whether an estate ultimately owes estate tax, which is currently limited to very large estates. The asymmetry is striking: Sell during life and face a potentially large tax bill, or hold until death and pass the property on tax-free. It is hardly surprising that many homeowners choose the latter.
As a general matter, we believe markets function best when policy minimizes unintended distortions rather than creates them. Taxes and regulations inevitably shape behavior, but when they discourage economically productive activity (in this case, housing mobility) they warrant reconsideration. Here, a well-intentioned tax provision has evolved into a structural drag on housing supply at a moment when mobility is essential for labor markets, family formation, and economic growth. If tax law already forgives gains at death, it should not punish homeowners who choose to move while alive.
The solution need not be radical. Resetting the $250k/$500k exclusion caps and indexing them for inflation would be the most straightforward fix. Other possible remedies include higher or one-time expanded exclusion for homeowners above a certain age or tenure threshold and/or allowing gains to be deferred by rolling them into a new primary residence.
Each of these approaches would reduce the lock-in effect without major alterations to the existing tax code. What is increasingly clear is that the status quo discourages homeowners from moving at precisely the moment the housing market and the broader economy needs greater flexibility.
Hans and Steve Wydler (the “Wydler Brothers”) are associate brokers and luxury real estate agents with Compass serving the D.C. Metro area, Maryland suburbs and Northern Virginia real estate markets.
