Your house appreciated. A 30-year-old tax rule hasn’t.
“I feel your pain.”
Remember 1997? Titanic was still in theaters, CD players were cutting-edge, and Congress decided that if you sold your home, you could exclude up to $250,000 of gain (or $500,000 for married couples) from tax under Internal Revenue Code Section 121.
That change came from the Taxpayer Relief Act of 1997 — a law so old it still predates the first iPhone, the first Facebook post, and most of the passwords we all reuse.
Back then, the exclusion probably made perfect sense. In 1997, home values were dramatically lower. Even adjusted for inflation alone, $250,000 in 1997 is roughly equivalent to about $500,000 in 2026 dollars. And of course, in many parts of the country (including Charlotte), home values have increased far more than inflation.
Fast forward nearly 30 years, and the $250,000 cap hasn’t budged an inch. It’s still $250,000. $500,000 for a married couple. In some markets like Charlotte, it doesn’t even cover the appreciation on a fairly ordinary home — especially if the owners have lived there for decades.
For example, Fred and Ethel purchased a residence back when the Gipper was President in the Southpark area of Charlotte for $150,000. The residence is now worth close to a million. If they sold now, they’d have $850,000 capital gains. The exclusion would take out $500,000, but $350,000 would still be taxable (that’d be north of $50,000 to Uncle Sam alone).
But here’s the part that’s especially interesting (and not just for tax nerds like me).
Some economists argue that this outdated exclusion contributes to what’s called a “lock-in effect.” In plain English, the idea is simple: if selling your home means paying a big capital gains tax bill, you might decide not to sell.
Even if you’d like to downsize. Even if the stairs are becoming a little less charming every year. Even if you don’t really need four bedrooms anymore, and you’re tired of paying someone to rake leaves the size of dinner plates.
And when you combine that with another familiar rule — the step-up in basis at death — the incentive becomes even stronger.
Sell now, and you may owe capital gains tax on the amount above the exclusion.
Hold until death, and your kids may inherit the home with a stepped-up basis, meaning the capital gain can be reduced dramatically… or even wiped out entirely.
So for many families, the tax system quietly rewards staying put.
And that’s where this stops being just a tax story and starts being a housing story.
If enough people hold on to homes longer than they otherwise would, it keeps some perfectly good houses off the market. That doesn’t help a country that already has a well-documented residential housing shortage. It doesn’t create more inventory. It doesn’t help younger families looking for starter homes. And it doesn’t help older homeowners who might actually prefer to move, if the tax consequences weren’t so lopsided.
Tax law can freeze in time, but home values sure don’t.
The punchline here is that Congress wrote this rule in 1997, when it was one thing. In 2026, it has become something else — not because Congress changed it, but because everything around it changed.
Whether Congress ever updates the exclusion is anyone’s guess. But for now, the $250,000/$500,000 limits remain a reminder that sometimes the most important tax rules aren’t the complicated ones. They’re the old ones that never got updated.
And if you’ve been living in the same home a long time, and you’re thinking about selling (or holding it for step-up planning), it’s worth running the numbers before you make a decision to sell.
