GOP Lawmakers Urge Treasury To Index Capital Gains to Inflation, Targeting the Hidden Home Equity Tax

The capital gains tax has returned to the forefront of national policy debate. 

Republican lawmakers are eyeing avenues to lower the tax burden when an investor sells an asset, Bloomberg reports, as concerns about inflation dominate the news cycle heading into a decisive midterm election.

Nearly a third of Americans report inflation and high prices as their top financial concern, according to a Gallup poll released Tuesday. And on Wednesday, Sen. Ted Cruz (R-TX), framed capital gains tax reform as a direct response.

“It would be the biggest step we could do to counteract the massive inflation under Joe Biden and the Democrats and have a positive impact on affordability, particularly affordability of housing, between now and the midterms,” he told Bloomberg.

While long treated as a niche issue impacting only wealthy investors, the capital gains tax burst into the national spotlight last summer, after Realtor.com® reported that 1 in 3 homeowners now has more equity than the exclusion threshold protects for single filers, exposing many everyday families to a punishing hidden home equity tax upon the sale of their primary residence.

It's a trend that's only expected to accelerate as the national housing shortage continues to push up home values—by 2030, the number of exposed households is projected to reach 56%.

The new proposal

In March, Cruz and Sen. Tim Scott (R-SC) wrote to Treasury Secretary Scott Bessent urging him to use executive power to peg the Department of the Treasury’s calculation of capital gains to inflation. Days later, several House Republicans joined the cause with their own letter.

The core of their argument is that inflation has fundamentally distorted the cost basis of capital gains. Under current law, an asset purchased for $1,000 and later sold for $5,000 results in a taxable gain of $4,000—exclusions and other preferential treatment aside—regardless of the dollar's purchasing power at the time of purchase.

Indexing would allow investors to adjust the original purchase price to its current value. For example, a purchase made for $1,000 in 2005 would be valued at $1,730 today, thereby reducing the taxable gain to $3,270. The difference is small in this example, but it can swell when an asset is held for many years and is worth many multiples of $1,000—like a home, for example.

That's why lawmakers frame homeowners as central beneficiaries, but this specific indexing proposal would extend to all assets. That represents a significant shift from more targeted legislative efforts, such as the bipartisan More Homes on the Market Act, which seeks to roughly double the current home sale exemption to $500,000 for individuals and $1 million for couples. 

While indexing adjusts the math behind the gain in a way that would likely benefit homeowners (as well as other types of investors), doubling the cap provides a direct shield for the total equity a primary homeowner can keep.

That nuance was at the center of former Rep. Marjorie Taylor Greene’s 2025 proposal, the No Tax On Home Sales Act, which would have eliminated the tax for the sale of primary residences only.

In an exclusive interview with Realtor.com in July, she described her proposed reform as a “gift to the American people,” and was careful to note that her idea was limited only to primary homeowners.

“This is not for home flippers. This is for people selling their primary residences ... and they will get to keep their money, get to keep their equity,” she said.

Further details of Cruz’s proposal have yet to emerge but he confirmed to Bloomberg that he has discussed his proposal with Bessent. It’s unclear if he would have the authority to do so unilaterally or if Congress would need to pass a law to change the calculation.

Whom would reform help?

Much of the debate around reform centers on whom it would benefit, and whom it would leave behind—and at the heart of that discussion is the housing market.

“Homeownership and long-term real estate investment remain central to achieving the American dream for millions of families. Yet under current tax treatment, taxpayers are often required to pay capital gains taxes not only on real economic appreciation, but also on nominal gains attributable solely to inflation,” House Republicans wrote in their letter to Congress.

While home prices have climbed more than 260% since the current capital gains tax structure was established in 1997, the primary residence exemption has remained stagnant at $250,000 for single filers and $500,000 for married couples filing jointly.

Research from the University of Illinois Chicago suggests that if these caps had kept pace with inflation, they would now stand at approximately $660,000 and $1.32 million, respectively—a significant difference that is leaving many Americans exposed to a tax liability they never expected.

That penalty is also frequently cited as a primary driver of the stuck housing market. 

Many entrenched homeowners choose to hold on to their properties indefinitely, hoping to pass them on to descendants who would benefit from a stepped-up cost basis, thereby avoiding the tax hit entirely. 

“I’ve been working with a neighbor for more than a decade who refuses to sell his property—even though it could easily go for $600,000—because he doesn’t want to take the hit from Uncle Sam,” Michelle Doherty, an agent with RLAH Real Estate in Arlington, VA, told Realtor.com in June. “He’s a World War II veteran and the nicest guy in the world, but he always tells me, ‘I’ve given Uncle Sam enough.’ It’s a perfect example of how these outdated capital gains thresholds are keeping homes off the market.”

Doherty’s sentiment is echoed by analyses from the Cato Institute and Moody’s, which suggest that reducing the tax burden could help free up much-needed housing supply.

However, critics warn that a less targeted approach could carry a heavy price tag for the federal government. A recent analysis from the Yale Budget Lab suggests that indexing capital gains across all asset types would be regressive, primarily benefiting the top 0.1% of earners. This small segment of the population could see an average tax cut of $350,000, while those in the bottom two income quintiles would see no benefit at all, according to their analysis.

The fiscal cost of indexing also remains a point of concern. 

Yale estimates that if indexing only applied to new purchases made after the law's enactment—for instance, in 2027—the cost would be roughly $170 billion over a decade. However, if the reform were applied retroactively to all existing assets, the cost to the federal government would balloon to $1 trillion over the same period.