Homeowners who sell their primary residence can shield up to $250,000 of profit from federal capital-gains tax, or $500,000 for qualifying married couples filing jointly. Congress set those dollar caps when it passed the Taxpayer Relief Act of 1997, signed into law on August 5, 1997. Nearly three decades later, those thresholds have never been adjusted, even as national home prices have more than doubled.
Why the frozen $250,000 and $500,000 caps hit harder in 2026
The exclusion sits in 26 U.S.C. Section 121, which is current through June 30, 2026. Under that statute, a single filer who meets the ownership and use tests can exclude up to $250,000 of gain on the sale of a main home. For certain joint returns, the statute substitutes $500,000. Those figures were written into the code in 1997 and have not moved since.
The gap between 1997 home values and 2026 home values is the core tension. When Congress chose $250,000 and $500,000, median sale prices were a fraction of what they are now. Sellers who bought decades ago in markets that experienced steep appreciation, particularly in coastal metro areas, can easily exceed the cap without owning anything resembling a luxury property. The result is that middle-income households holding long-term homes face a tax bill their counterparts in the late 1990s would not have owed.
If the exclusion had been indexed to a broad home-price measure starting in 1997, the share of sellers generating taxable gains above the cap would likely have stayed small. Instead, fixed dollar limits combined with rising prices have steadily expanded the pool of homeowners whose profits exceed the threshold. Congress chose not to build an inflation adjustment into the original law, and no subsequent legislation has added one.
Statutory origins and regulatory framework behind the fixed caps
The Taxpayer Relief Act of 1997 rewrote Section 121 entirely. Before that law, homeowners over age 55 could claim a one-time exclusion, and younger sellers had to roll gains into a replacement home to defer tax. The 1997 rewrite replaced both mechanisms with a simpler, repeatable exclusion tied to the $250,000 and $500,000 dollar amounts. A Congressional Research Service analysis of the revision described the policy shift and the rationale for the flat caps.
The Treasury Department later issued final, temporary, and proposed regulations under Section 121 to clarify how the exclusion works in practice, covering definitions of principal residence, partial exclusions, and common fact patterns. The IRS spells out the eligibility rules in its public guidance: taxpayers must have owned and used the home as a main residence for at least two of the five years before the sale. Joint filers claiming the $500,000 cap must meet additional requirements.
