The Residential Exclusion Amount is a Win-Win

The Residential Exclusion Amount is a Win-Win ...

CPA PPA, Robert Klein

If your principal residence was purchased for two or more years during the five-year period ended on the date of sale, you have been permitted to sell your principal residence. Exceptions include gain of up to $250,000 if using a single filing status and up to $500,000 if married filing joint. The home exclusion rule applies only if the property was owned and used as your principal residence for two or more years. Exclusion is generally allowed no more often than once every two years.

Robert Klein

While the home-sale exclusion was a welcome change when it became effective in 1998, it has failed to keep pace with housing inflation. According to the United States Bureau of Labor Statistics, housing inflation rates were 81.94% higher in March and 2022 than when 1998. The housing price inflation-adjusted amounts should be $455,000 and $910,000, respectively.

Inflation began noting that day when annual rates increased from 2.6 percent in March 2021 to 2.4 percent in April, bringing steady increases to a new four-decade high of 8.5 percent in March 2022. This has resulted in an enormous housing shortage and associated buying frenzy, with no end in sight for the long term.

Increased mortgage rates, as well as the fact that homeownership growth can't override income growth forever, will cause the buying frenzy to come to an end. High real estate taxes, higher mortgage rates, and other rising costs of homeownership will make ongoing affordability difficult for recent homebuyers.

Given the origins of the current housing shortage, a reduction in housing inventory without a component of stimulus is more problematic. Among the factors causing the housing market frenzy, namely: "a flight from urban areas by pandemic-weary apartment dwellers looking for more space, a construction industry that has been underdeveloped for the past decade, and developers who are coping with rising labor costs.

The following factors have created a perfect storm for Congress to enact legislation to double the home-sale exemption amounts of $250,000 (single) and $500,000 (married filing joint) to $500,000 and $1 million, respectively. Ignoring the dramatic increase in inflation over the past 13 months that isn't expected to subside anytime soon, the home-sale exclusion should be $455,000 and $910,000, if simply adjusted for housing inflation over the last 24 years.

Due to the low home-sale exemption, a double of the home exclusion would increase existing housing inventory. This would attract individuals with highly-appreciated houses that wish to sell but have not felt much appreciation for it. Many of these individuals are completely unaware of selling their homes given the fact that their heirs will be able to do so with much less or no income tax liability when they died.

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A double of the home-sale exemption would reduce the amount of highly-appreciated properties. Many of these properties have significant improvements, compared to the previous increase, which would result in a significant increase in federal and state income tax revenues.

What is the possibility of a loss of tax revenue from increased home-sale exclusion amounts? I believe that the total additional income tax liability attributable to taxable capital gains from the sale of primary residences that would otherwise occur will far exceed reduced income attributable to the increased exclusion.

Given the length of time from proposal to enactment of this type of legislation, it is advised that the legislation should be retroactive to its original date. Doing so would kick-start the housing shortage, increase tax revenue sooner, provide a stimulus for the economy, and provide a public relations opportunity for a much-beleaguered and divided Congress in recent years. This would be particularly appreciated given the previous year.


The double of the residential exclusion amount from $250,000 for single filers and $500,000 for joint filers is a win-win situation. It would increase tax revenue while reducing the existing housing shortage and enhance the affordability of residential properties. Finally, it would make homeowners less dependent on mortgages since housing wealth would be freed up.

Robert Klein, author of The Chronicles

Robert Klein, CPA, PFS, CFP, RICP, and CLTC is the founder and CEO of in Newport Beach, California. Bob is the creator and publisher of a YouTube channel that includes tax-sensitive and innovative methods for raising and optimizing retirement income. Bob is also the author and publisher of a blog, which was founded in 2009.

Bob utilizes his extensive knowledge, expertise, and expertise in tax-sensitive retirement income planning techniques, including fixed income annuities, Roth IRA conversions, and HECM reverse mortgages, and charitable remainder trusts, to maximize the projected longevity of his clients after-tax retirement income and assets.

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