Whenever I sit down with a potential home seller, one of the first conversations we have is about taxes. For investment properties, 1031 Exchanges allow owners to defer capital gains and roll equity into new opportunities. But for owner occupied homes, the IRS rules are much stricter sales rely on the limited capital gains exclusion set back in 1997.
That law was groundbreaking at the time. It allowed married couples to exclude up to $500,000 in profit (and single filers up to $250,000) when selling their primary residence. Even better, it eliminated the old requirement that sellers reinvest in a “like kind” property to avoid taxes, giving homeowners more freedom. The money could go into a new home, a second property, or even something completely unrelated to real estate.
The Problem: 1997 Rules in a 2025 Market
Here’s the issue: those exclusion amounts have never been indexed for inflation. Nearly three decades later, with Los Angeles home values far above national averages, the limits are outdated and inadequate. If the caps had been adjusted along with housing price growth, today’s exclusion levels would be closer to $885,000 for singles and $1.77M for couples. Even a basic consumer price index adjustment would set them at $500,000/$1,000,000. Instead, we’re still stuck with the original thresholds. That leaves longtime homeowners facing substantial and unexpected tax bills, even when a large chunk of their “gain” is simply inflation, not true wealth creation.
Inflation vs. Real Gains
Consider this: a Los Angeles home purchased in the late 1990s for $400,000 could be worth more than $800,000 today just from inflation alone, before factoring in demand, improvements, or location premiums. Yet the IRS treats all of that as taxable gain above the exclusion limits. This essentially penalizes owners who’ve stayed put for decades, taxing them on dollars that don’t reflect actual greater buying power.
Example: San Fernando Valley Homeowner
Take a single homeowner who bought in the Valley 25 years ago for $250,000.
Value today (2025): $1,250,000
Total gain: $1,000,000
Exclusion: $250,000
Taxable gain: $750,000
Estimated tax hit (25% combined): $187,500
That’s nearly $200,000 in taxes, much of which represents inflationary “growth” rather than real financial gain.
Real-Life Impact on Families
The consequences aren’t just financial. Families often face these rules in the toughest of circumstances. For example, when aging parents need to move into a care facility and the home must be sold to pay for their expenses, the outdated exclusion rules can eat away at proceeds that should be covering long term care. Families are then left with two bad options: sell now and lose a significant portion of the proceeds to taxes, or wait until after death to use the stepped-up basis. Neither choice is fair to families who’ve worked hard to build equity.
Proposed Solutions in Congress
There’s movement to fix this:
The More Homes on the Market Act (H.R. 1321): Would double the exclusion limits and index them to inflation. It already has strong bipartisan support with dozens of cosponsors.
The No Tax on Home Sales Act (H.R. 4327): Proposes eliminating capital gains taxes entirely on primary home sales, though it has limited backing at this stage.
Even a modest update would make a huge difference by freeing longtime owners to sell without fear of a crushing tax bill.
Why This Matters in Los Angeles & Ventura County
In the 1990s, homeowners typically sold every 6–7 years. Today, the average tenure in Los Angeles has stretched past 13 years. High prices, Proposition 13 property tax protections, and outdated federal tax exclusions all contribute to keeping people locked in.
For our region, where the median home price is far higher than the national average, raising the exclusion would be a game changer. It would give retirees the flexibility to downsize, open up sorely needed inventory for move-up buyers, and create opportunities for younger families trying to enter the market.
It’s long overdue. Modernizing this tax provision would not only support homeowners but also help restore balance to the Los Angeles housing market.