Your Home, Your Taxes: Unpacking the Latest Changes That Could Save You Money and Reshape the Housing Market

For many individuals, a home represents more than just a place to live; it is often the most significant asset and a cornerstone of financial stability. Understanding the intricate world of tax policies is therefore not merely an exercise for specialists, but a crucial endeavor for every homeowner and aspiring buyer. These rules directly influence the cost of homeownership, the wealth accumulated through property, and even the vibrancy of the housing market itself. When tax policies are well-understood, individuals are better equipped to manage their finances effectively, potentially keeping more of their hard-earned money and contributing to a more dynamic housing landscape.

Tax policy extends beyond simple revenue collection; it serves as a powerful instrument for influencing economic behavior and shaping societal outcomes. The direct impact of these policies on personal finances makes it imperative for consumers to grasp their nuances. Without this understanding, individuals might inadvertently miss out on substantial savings or make less-than-optimal financial and housing decisions. This report aims to bridge that knowledge gap, focusing on two pivotal areas: the State and Local Tax (SALT) deduction and the capital gains exclusion on home sales. By demystifying recent changes and proposed reforms, this analysis will highlight their practical importance, offering actionable insights that can lead to real savings, inform housing choices, and contribute to a healthier, more accessible housing market.

The SALT Deduction — A Lifeline for Homeowners (and Renters!)

The State and Local Tax (SALT) deduction allows individuals to reduce their federal taxable income by the amount of certain taxes they have already paid to their state and local governments. It functions much like a credit on a federal tax bill for money already contributed to local services such as schools, roads, and public safety.1 This deduction's historical purpose has been to prevent income from being taxed twice—once by state and local authorities and again by the federal government—underscoring its foundational role within the U.S. tax code.1

Generally, the SALT deduction covers property taxes, often referred to as "real estate taxes," as well as state income taxes or state sales taxes.1 Taxpayers typically choose to deduct either their state income taxes or state sales taxes, in addition to their property taxes, depending on which provides a greater benefit.1 To claim the SALT deduction, taxpayers must itemize their deductions on IRS Form 1040 Schedule A, rather than taking the standard deduction.1 For the 2025 tax year, the standard deduction amounts are $15,750 for single filers, $31,500 for married couples filing jointly, and $23,625 for heads of household.6

The choice between itemizing and taking the standard deduction is crucial for determining who benefits from SALT. If a taxpayer's potential itemized deductions, including SALT, are less than the standard deduction, they will opt for the standard deduction, effectively rendering the SALT benefit irrelevant for them. This dynamic became particularly significant following the 2017 Tax Cuts and Jobs Act (TCJA), which substantially increased the standard deduction.6 This increase, combined with the new SALT cap, meant that fewer individuals found it advantageous to itemize their deductions, thereby reducing the number of taxpayers who could claim the SALT benefit. This illustrates how a change in one tax provision, like the standard deduction, can profoundly alter the impact and relevance of another, such as the SALT deduction, even for those who might theoretically qualify.

The $10,000 Problem: How the Old Cap Hurt Many

A dramatic shift occurred with the 2017 Tax Cuts and Jobs Act (TCJA), which imposed a $10,000 cap on SALT deductions for tax years 2018 through 2025.1 This was a stark departure from the previous system, which had no such limitation. The impact on taxpayer behavior was immediate and significant: the percentage of individual income tax returns that included itemized deductions plummeted from 31% in 2017 to a mere 9% in 2020.6 This sharp decline clearly demonstrates how many taxpayers were effectively pushed away from itemizing, thereby losing access to the SALT deduction.

This $10,000 cap disproportionately affected homeowners and high-income earners residing in states with high property and income taxes, such as New York, New Jersey, California, Connecticut, Massachusetts, Illinois, and Texas.3 For instance, in New Jersey, a striking 40% of homeowners faced property tax bills exceeding $10,000, making the cap a tangible financial burden for a large segment of the population.10

The imposition of the SALT cap created a significant fiscal tension between the federal government and these high-tax states. These states argued that the cap unfairly penalized their residents and restricted their ability to adequately fund essential local services. This contention led to legal challenges, with states like New York, New Jersey, and Connecticut suing the federal government over the constitutionality of the cap, asserting it infringed upon their ability to set their own tax policies.8 Furthermore, a bipartisan group of House lawmakers formed a "SALT caucus" to advocate for the repeal or increase of the $10,000 limit, even threatening to block other legislative efforts if their demands were not met.8 This demonstrates how federal tax policy can influence intergovernmental relations and foster political coalitions based on regional economic characteristics, illustrating that the argument for "fairness" extends beyond individual taxpayers to encompass the balance of power and financial autonomy among different levels of government.

Adding to the perceived inequity, critics argued that the cap created an unfair "double standard." While businesses and landlords continued to deduct their state and local taxes without limitation, individual homeowners were subjected to this strict cap, placing them at a disadvantage in achieving the "American dream of homeownership".2

The "One Big Beautiful Bill" Act: Your New Tax Relief (for Now!)

In welcome news for many taxpayers, the "One Big Beautiful Bill Act" (OBBB) was signed into law on July 4, 2025.6 This legislation represents the most significant shift in SALT policy in nearly a decade.9 The OBBB temporarily increases the SALT deduction cap from $10,000 to $40,000, effective for the 2025 tax year.6 For married couples filing separately, the cap is set at $20,000.7 This increased limit will also see a slight 1% annual increase through 2029.7

The new cap structure is designed to provide more equitable tax relief, specifically targeting middle- and upper-middle-income earners in high-tax states.9 This approach is a nuanced compromise, not a full repeal of the cap, but a strategic increase. The compromise reflects a delicate political balancing act between addressing concerns about federal revenue (as critics often argue that SALT benefits disproportionately high earners and reduces federal income) 3 and responding to intense constituent pressure from states heavily impacted by the previous cap.9

A key mechanism within the OBBB is the "phasedown" for taxpayers with a Modified Adjusted Gross Income (MAGI) exceeding $500,000.6 For these higher earners, the deduction is reduced at a rate of 30% for the amount by which their MAGI surpasses the threshold, eventually reverting to the original $10,000 cap for those with MAGI over $600,000.7 This structure attempts to address the long-standing criticism that the SALT deduction primarily benefited the wealthiest taxpayers.3 By limiting the benefit for the absolute top earners while still providing significant relief to a broader segment of high-income households burdened by high state and local taxes, the OBBB represents a pragmatic political solution to a contentious issue. It also reflects the influence of lobbying efforts from groups like the "SALT caucus" and the National Association of REALTORS® (NAR).6

It is crucial to understand that the $40,000 cap is temporary. It is currently scheduled to revert to the $10,000 limit in 2030 unless Congress takes further action to extend or make the increase permanent.6 This temporary nature creates ongoing uncertainty for both individual financial planning and state revenue projections.9 While some sources suggest the "permanent nature of the new cap provides a stable planning horizon" 9, this likely refers to the

structure of the cap (including its phase-outs) rather than the $40,000 amount itself. The looming 2030 deadline guarantees that the "contentious issue" of SALT will resurface in political debate 7, leading to renewed lobbying efforts and potential legislative maneuvering, which can make long-term financial planning more challenging for taxpayers.

For individuals, the implications of this change are significant:

• Increased Disposable Income: By raising the SALT cap, many taxpayers will experience increased federal tax savings, which directly translates to more money in their pockets. This boost in disposable income has the potential to stimulate local economies.9
• Restored Fairness: For millions of taxpayers, especially those in high-tax states, this adjustment restores a degree of fairness to the tax code, acknowledging the substantial state and local taxes they pay.9
• Influence on Housing Decisions: The increased deductibility could make homeownership more attractive and financially viable in high-tax states. This shift in affordability could potentially influence migration patterns and where individuals and families choose to establish their homes.10

Making the Most of Your SALT Deduction: Practical Tips

To fully leverage the benefits of the new SALT limit, individuals must itemize their deductions on IRS Form 1040 Schedule A when filing their federal tax returns.6 Beyond SALT, other common and significant itemized deductions include mortgage interest (which remains deductible at the levels set by the TCJA of 2017) 6, contributions to qualified charitable organizations, and medical and dental expenses that exceed a certain percentage of adjusted gross income.6 A notable reinstatement under the new tax law is the deductibility of private mortgage insurance (PMI) premiums, a benefit particularly relevant for borrowers with less than 20% equity in their homes.6

To ensure all entitled deductions are claimed and to facilitate a smooth tax filing process, meticulous record-keeping is paramount. Taxpayers should diligently retain all relevant documents and receipts, including property tax statements, records of state income tax payments, and documentation for any large sales tax purchases. This careful record-keeping is essential for substantiating deductions and avoiding missed opportunities for tax savings.6

Table 1: SALT Deduction Caps: Then vs. Now vs. Future

This table serves as a valuable resource for individuals, distilling complex legislative changes and future projections into a clear, comparative visual. It allows for an immediate understanding of how the SALT cap has evolved and what to anticipate in the coming years. By presenting the different cap amounts across various time periods, alongside the relevant legislation and their practical implications, the table directly addresses the importance of these changes to the average person, providing a concise snapshot of potential tax liabilities over time. This helps individuals quickly grasp the why behind the changes and who they affect differently, enabling them to make more informed financial decisions.

Capital Gains on Home Sales — Unlocking the "Frozen" Housing Market

Understanding Capital Gains on Your Home

When a home is sold for more than its purchase price, the resulting profit is known as a capital gain. These gains are typically subject to taxation. However, current tax law provides an exclusion for capital gains on the sale of a primary residence.14 Under this provision, single filers can exclude up to $250,000 in capital gains, while married couples filing jointly can exclude up to $500,000.14 To qualify for this exclusion, the homeowner must have owned and lived in the home as their primary residence for at least two of the five years preceding the sale.

The challenge with these existing rules is that they are increasingly outdated. The current exclusion caps were established in 1997 and have not been adjusted to keep pace with the rapid appreciation of home values over the past quarter-century.14 This disconnect between historical tax policy and current market realities is at the heart of what is now termed the "stay-put penalty."

The "Stay-Put Penalty": Why Homeowners Aren't Selling

A study by the National Association of REALTORS® (NAR) highlights the growing severity of this issue. Currently, 34% of homeowners possess enough equity in their homes to potentially exceed the $250,000 capital gains cap for single filers, and over 10% could exceed the $500,000 threshold for married couples.14 These figures are projected to escalate dramatically, with more than 56% of homeowners potentially exceeding the $250,000 exclusion by 2030, and nearly 70% by 2035.14 The problem is even more pronounced in high-priced markets such as California, Massachusetts, and Colorado, where by 2035, over 40% of homeowners in 20 states may face significant tax penalties upon selling their homes.14

This situation creates a powerful disincentive for homeowners, particularly older individuals, to sell their properties. They become reluctant to move because doing so would trigger a substantial, often unexpected, tax bill on their capital gains, even if much of that "gain" is simply due to inflation rather than true economic growth.14 This behavioral response to a tax disincentive leads to a significant market inefficiency. Homeowners who might otherwise downsize, relocate for work, or move closer to family choose to remain in their current homes. When aggregated across millions of homeowners, this decision to "stay put" results in a considerable reduction in the available housing inventory. This establishes a direct causal link between an outdated tax policy and a stifled housing supply.

The reluctance of homeowners to sell has ripple effects that reverberate throughout the entire housing market:

• Fewer Homes Available: With fewer existing homes entering the market, prospective buyers face a limited selection, particularly in desirable areas.14
• Higher Prices: Reduced inventory intensifies competition among buyers, which in turn drives up home prices, making homeownership less accessible for many.14
• Reduced Turnover: This stagnation in housing turnover hinders economic mobility and prevents the natural flow of properties that characterizes a healthy, dynamic housing market. As Shannon McGahn, NAR's executive vice president and chief advocacy officer, aptly puts it, this situation is "exactly the opposite of what public policy should be encouraging".14

The "More Homes on the Market Act": A Proposed Solution

To address this critical issue, the National Association of REALTORS® is actively supporting a bipartisan bill known as the "More Homes on the Market Act".14 This legislation is specifically designed to alleviate the "stay-put penalty" and inject much-needed fluidity into the housing market.

The core proposals of this bill include doubling the capital gains exclusion amounts: to $500,000 for individual filers and $1 million for married couples filing jointly.14 Crucially, the bill also proposes adjusting these new caps for future inflation. This forward-thinking provision aims to prevent the exclusions from becoming outdated again, ensuring that the tax code remains relevant to market realities over time.14

The intended effect of modernizing this provision is to make older homeowners "more willing to sell because they don't have to pay that big capital gains tax," according to Evan Liddiard, NAR's director of federal taxation.14 This willingness to sell is expected to lead to several positive outcomes:

• Restored Fairness: The bill seeks to ensure that building equity in a home, which is the primary method for many middle-class Americans to accumulate wealth, is not penalized by an outdated tax structure.14
• Increased Inventory: With more homeowners feeling financially comfortable to sell, a significant increase in the supply of homes available for sale is anticipated.
• Boosted Market Fluidity: A greater supply of homes and increased turnover would contribute to a healthier, more dynamic housing market, benefiting both sellers and buyers.

Table 2: Capital Gains Exclusion on Home Sales: Current vs. Proposed

This table provides a clear, visual comparison of the current, outdated capital gains exclusion limits versus the proposed, modernized limits. It effectively illustrates the magnitude of the potential relief offered by the "More Homes on the Market Act." By presenting the dollar amounts side-by-side for single and married filers, it allows for immediate understanding. The inclusion of the "Inflation Adjustment" row highlights a crucial, forward-thinking aspect of the proposed bill, which is vital for its long-term relevance. Ultimately, this table helps individuals understand the potential financial benefit of the proposed legislation, reinforcing its importance to the average person by clearly showing how it could impact their ability to sell their home without facing an excessive tax burden.

What This Means for YOU: The Average American

The recent tax policy adjustments, both enacted and proposed, carry significant implications for individuals across the spectrum of homeownership, from those currently owning a home to those aspiring to buy one. These changes are not merely abstract tax rules; they directly impact personal finances and the broader housing market.

For Current Homeowners

The temporary increase in the SALT cap to $40,000 means tangible federal tax savings are within reach, particularly for those residing in high-tax states.6 This direct reduction in tax liability translates into more disposable income, which can be used for savings, investments, or other expenditures.

Homeowners should actively re-evaluate their tax strategy for the upcoming tax year. If they previously opted for the standard deduction because the $10,000 SALT cap made itemizing less beneficial, the higher $40,000 cap, coupled with the reinstated deductibility of private mortgage insurance (PMI) premiums, might now make itemizing a more advantageous approach.6 These tax changes are not passive benefits; they require active engagement and strategic planning from homeowners to maximize their financial advantage. To realize these potential savings, homeowners must understand if they qualify for itemization, diligently track their eligible expenses, and potentially adjust their financial plans accordingly. This shifts the responsibility from passively accepting tax law to actively managing one's financial well-being.

Furthermore, homeowners who have been hesitant to sell their properties due to the potential for large capital gains taxes should closely monitor the progress of the "More Homes on the Market Act".14 The passage of this legislation, which proposes doubling the capital gains exclusion and adjusting it for inflation, could remove a significant financial barrier to moving. This could enable them to make housing decisions based on life needs, such as downsizing, relocating for family, or moving to a new community, rather than being financially "frozen" in their current homes.

For Aspiring Homebuyers

The increased SALT deduction can indirectly enhance the affordability of homeownership, especially in high-tax regions.10 By reducing the overall federal tax burden for those who itemize, it can make the financial commitment of buying a home more manageable. This improved affordability could broaden the range of options available to prospective buyers regarding where they can afford to purchase a home.

Perhaps even more significantly for homebuyers, the proposed capital gains reform under the "More Homes on the Market Act" could lead to a substantial increase in housing inventory.14 If older homeowners are encouraged to sell their properties without facing punitive tax bills, more homes will become available on the market. This influx of supply would mean more choices for homebuyers and could potentially alleviate the intense competition and upward pressure on home prices that have characterized many markets.

Collectively, these tax policies could significantly influence decisions about where to live.10 The enhanced SALT deduction might make certain high-tax regions, which were previously considered financially prohibitive for homeownership, more viable. Similarly, the capital gains reform could free up inventory in established neighborhoods, offering more opportunities for buyers seeking homes in those areas.

The Bigger Picture: A Healthier Housing Market?

Ultimately, these tax policy adjustments, both those recently enacted and those currently under consideration, are designed to inject much-needed fluidity and fairness into the real estate market.10 The overarching goal is to empower individuals to make housing decisions that align with their life circumstances and preferences, rather than being constrained by unfavorable tax implications. By reducing financial penalties for selling or owning in certain areas, these policies aim to foster a more dynamic market where properties can change hands more freely.

It is important to acknowledge, however, that the $40,000 SALT cap is temporary, set to revert to $10,000 in 2030, and the capital gains reform is still in the legislative process.6 This highlights the dynamic nature of tax policy, which is subject to continuous debate and adjustment. The ongoing political contention surrounding these provisions, particularly given their "relatively large budgetary impact" on federal revenues 7, ensures that they will remain topics of discussion and potential future modification. This continuous debate and the temporary nature of some provisions underscore the inherent tension in tax policy between generating federal revenue, providing targeted relief to specific groups, and influencing broader economic behavior. It suggests that while these "solutions" offer immediate benefits, they are often compromises that may require further adjustments in the future as economic conditions and political priorities evolve. This means individuals must remain vigilant and informed about potential future changes to effectively plan their finances.

Conclusion: Your Power to Understand and Act

The recent enactment of the "One Big Beautiful Bill Act," which temporarily raises the SALT deduction cap, and the ongoing legislative efforts to modernize capital gains exclusions on home sales represent significant developments for anyone involved in the housing market. These are not abstract tax rules confined to legal texts; they directly impact personal finances, housing affordability, and the overall health of the real estate market.

The temporary SALT relief offers a tangible opportunity for many homeowners, particularly those in high-tax states, to realize federal tax savings, translating into more disposable income. Meanwhile, the proposed reforms to capital gains exclusions aim to unlock a "frozen" housing market, potentially increasing the supply of homes and easing price pressures for aspiring buyers.

Understanding these changes empowers individuals to make smarter financial and housing decisions. This includes optimizing tax filings by re-evaluating itemization strategies and making more informed choices about when and where to buy or sell a home. Given the complexity and dynamic nature of tax law, it is always advisable to consult with a qualified tax advisor or financial professional. Their personalized guidance can ensure that individuals maximize their benefits, navigate specific circumstances, and remain compliant with evolving regulations. Staying informed and seeking expert advice are the most effective ways to leverage these significant tax policy shifts for personal financial well-being.

Works cited

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