We are pleased to share this guest blog provided to our readers by Ken DeLeon, Founder of, DeLeon Realty, a leading Silicon Valley based brokerage firm. While we do not believe any information in this article to be inaccurate or misleading, we are not responsible for the content, and it should not be relied upon in making an investment decision.
The following article that I wrote was sent to journalists and inspired articles in Fortune Magazine and The Epoch Times. These articles, which quoted me extensively, were featured in many other publications and were picked up by Apple News.
What if I told you that a 28-year-old tax code was the reason why homeownership today is so hard to attain? What if you found out that America's historically low housing supply - and consequently record-high home prices- are artificially caused by an antiquated tax code not being indexed for inflation or home appreciation for nearly three decades? And what if I told you that by amending this tax code, our country would likely bring in more overall tax revenue, increase housing supply and inventory, and further stimulate the economy- all while rewarding long-term homeowners and supporting our aging population? All of these goals can be achieved by doubling the outdated $250,000 capital gains exemption per resident to $500,000 for primary residences.
President Bill Clinton signed the Taxpayer Relief Act of 1997, which introduced a significant change to the taxation of home sales. Specifically, it allowed homeowners to exclude up to $500,000 in capital gains from the sale of their primary residence if they were married, or up to $250,000 for single filers, provided they had lived in the home for at least two of the five years preceding the sale. This provision replaced the previous "rollover" rule, which required homeowners to reinvest the proceeds from a home sale into a new property to defer capital gains taxes- effectively preventing taxation for those trading up.
While initially viewed as a positive for real estate investment, the failure to index the exemption amount to inflation has resulted in excessive taxation and a large reduction in home sales.
According to the National Association of Realtors, in 1997, the average existing (not new) American home sold for $126,100. In 2024, that has increased to $407,600, generating appreciation of more than 223%.
However, this poorly written tax code did not index the exemption amount to home price appreciation or inflation (which has effectively doubled over this timeframe). As a result, while very few homeowners paid capital gains taxes in 1997, many now face them in exorbitant amounts. Additionally, the federal capital gains tax rate was lower in 1997 – just 20% – and has since increased to 23.8%. Most state tax rates on capital gains have also increased, with California’s additional tax rate increasing from 9.3% in 1977 to 13.3% now. In California, the combined federal and state capital gains rate went from 29.3% to 37.1%.
This capital gains dynamic, fueled by appreciation and inflation, is even more burdensome in coastal regions. I have experienced this firsthand, as I am a residential real estate broker in Palo Alto, and I can recall when the median home price in Palo Alto was $540,500 in 1997. In April 2025, the median price of a home in Palo Alto was $4,150,000 – an increase of 667%.
The large appreciation homes around the country have seen, coupled with no increase in the exemption amount, has greatly increased the capital gains sellers must now pay. As a result, we have, and will continue to see, a sharp reduction in the number of homes available for sale as sellers seek to avoid this significant tax liability. As I said in The Epoch Times, “This outdated capital gains law has resulted in an artificially-created housing shortage… Some of these sellers could now be facing capital gains taxes of over $1 million.”
While capital gains is a more pressing issue in California and other coastal states with high home values, the negative impact on housing supply that is already unfolding in California will also impact other states as their median home values rise above the exemption threshold. The old saying, “As goes California, so goes the nation” captures the dynamic well. The loss of homes being marketed and sold due to capital gains taxes in California will soon echo across the country.
Take a look at four of the top five counties (per Silicon Valley MLS statistics) in California for total single-family home sales transactions in 2001 (the earliest year with comprehensive data), and you’ll see a precipitous drop of over 50% in the number of new listings that these counties offered in 2024.
Collectively, four of the top five counties in California saw a 57% decline in homes available for Purchase compared to 2001 levels. The only top county I have omitted is Los Angeles County, due to its imposition of a “Mansion Tax” that increased its tax liability and further depressed sales. This decline is even more shocking when you consider that all of these counties grew in population and experienced substantial appreciation in the value of their housing stock since 2001.
This tax code puts California in a negative feedback loop: greater appreciation causes greater tax liability, and increasingly sellers “cannot afford” to sell due to this high tax burden – which in some cases can reach over a million dollars in taxes. This, in turn, causes sellers not to sell, which lowers inventory, drives up prices, and increases tax liability even further. As I told Fortune,“You’re almost stuck, the family home becomes almost sort of a prison… Young families don’t have the supply of homes that they want, and then you have senior citizens who cannot enjoy the last chapter of their life because they are cash poor but house rich.”
The fact that higher taxes impede sales is clearly evidenced by the well-intentioned, yet poorly executed, “Mansion Tax,” that the city of Los Angeles enacted. Los Angeles has added this additional tax, which is 4% for property sales above $5 million and 5.5% tax for sales above $10 million. An analysis by the Los Angeles Times found that home sales of $5 million or more, dropped a staggering 68%. In neighboring Beverly Hills, which has no Mansion Tax, sales only dropped 24% from peak volume.
The reality is that a home sale is an elective choice, and whether a family decides to sell involves weighing several pros and cons. In this balance, excessive taxation encourages significantly fewer home sales and many negative consequences, including lower effective tax revenues for our municipalities due to this steep drop in transactions.
The Laffer Curve champions the idea that there is an optimal tax rate to maximize revenue. It recognizes that when tax rates become too high, fewer transactions occur. Conversely, tax revenues can paradoxically be higher with a lower tax rate that encourages more sales volume. While the Laffer Curve may not work well with income tax, as working is usually involuntary, it applies fluidly to elective choices, such as choosing whether to sell one’s home and trade up or simply to remain where you are.
The significant decline in California home sales not only means less capital gains for the sales that would otherwise have occurred at a lower tax rate, it also results in a loss of the many other tax benefits that trickle down when a sale occurs. Not only do counties and cities benefit from transfer tax revenue, the property tax is reset and significantly increased upon selling at the current property value at the time of sale as opposed to the lower tax rate that legacy owners enjoy.
Since property taxes are limited to only go up 2% per year in California (even if appreciation is over 10%), fewer transactions also mean lower property tax income. As a result, long-time owners usually pay a fraction of the property taxes that new owners pay, so more sales would result in much higher property taxes to fund local governments.
Many additional benefits would result from indexing the capital gains exemption, including not only more houses being available, but also would provide:
Housing Mobility – A higher exemption would promote healthier housing turnover and a better matching of people with appropriately sized homes. Many seniors live in large homes they no longer wish to maintain, but they stay to avoid the capital gains liability. Conversely, young families are often stuck in smaller homes and condos due to the high barrier to entry and extreme competition imposed by the lack of inventory. Just as New York’s rent control laws result in seniors staying in large apartments they no longer want, the same happens with homes. No one moves out when they should or want to, and housing mobility is stifled.
Relief for Long-Term Homeowners – Owners who have lived in their homes for decades often face large unrealized gains simply due to time and market growth. An increased exemption would reward stability and long-term ownership by raising the exemption threshold for long-term primary residences. Senior citizens often rely upon their home investment for their means to live a full, fulfilling life in their golden years, but many find themselves near poverty and cash-poor when high taxes prevent them from selling the family home. Seniors living alone are more prone to both loneliness and accidents, so moving to a retirement community would provide them with greater societal interaction and medical attentiveness, better aligning with their needs.
Societal Equity and Wealth Building - Greater well-being and societal equity would be achieved, as real estate is one of the primary ways middle-class Americans build wealth. Without a higher exemption, typical families— especially in high-cost cities—end up owing capital gains taxes on what is viewed as a “normal” house. Also, if inflation is driving up home values, but they are not increasing in real terms relative to inflation, it feels “unfair” to pay taxes on “appreciation” that merely is at the rate of inflation.
Economic Stimulus – Economic stimulus would result as real estate is one of the most important contributors to the American economy, with real estate-related (including construction) services accounting for an estimated 15%-18% of our GDP.8 Furthermore, allowing homeowners to retain a greater share of the profit from their home sales could increase consumer spending and facilitate investment in new homes and local economies. Thankfully, the problems that stem from the lack of an appropriate exemption may soon be rectified. In February 2025, Representative Jimmy Panetta (D-CA) introduced an act aptly entitled, “Bringing More Homes to the Market Act”, which aims to amend the Internal Revenue Code to double the exclusion of gain from the sale of a principal residence. While the bill’s passage is far from guaranteed, it illustrates politicians’ growing interest in adjusting the exemption thresholds. If this bill is not passed, the declines in housing inventory, along with the consequences of greater housing costs and increased homelessness, will only get worse. Hopefully, Mr. Panetta’s final bill will continue to receive bipartisan support.
There is nothing more tangible to the American Dream than owning a home. Let us enact a policy that will make home ownership easier for everyone and allow the societal benefits of greater homeownership to become a reality again. Please reach out to your Senator and House Representative to let them know that you support the “More Homes on the Market Act.”
For more information on this article, please feel free to contact FGG1031 at info@firstguardiangroup.com
Sources
https://ycharts.com/indicators/us_existing_home_ median_sales_price_yearly
https://www.wolterskluwer.com/en/expert-insights/ whole-ball-of-tax-historical-capital-gains-rates
https:// www.paloaltoonline.com/morgue/cover/1997_ Mar_19.COVER19.html
https:// fortune.com/2025/06/05/home-sale-capital-gains-exemption-500000/
https://www.nahb.org/news-and-economics/ housing-economics/housings-economic-impact/housings-contribution-to-gross-domestic-product
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