A new bill introduced by Representative Marjorie Taylor Greene, aptly named the No Tax on Home Sales Act, would eliminate capital gains tax on the sale of your primary residence—a sweeping shift from the current rules and a move that would bring U.S. tax policy more in line with Canada’s treatment of primary home sales.
Current U.S. Law: The 2-Out-of-5 Rule
Under existing U.S. tax law, homeowners can exclude up to $250,000 in capital gains from taxation if they are single—or $500,000 if married filing jointly—when selling their primary residence. But there’s a catch: you must have lived in the property as your primary residence for at least two of the five years prior to the sale.
While this rule helps many, it falls short in several situations:
- Homeowners in high-appreciation areas often exceed the exemption.
- Those who move abroad or convert their primary home into a rental can quickly lose exemption eligibility.
- It creates complexity and unexpected tax liabilities for people who move frequently, whether for work, lifestyle, or family reasons.
The Canadian Model: A Simpler (But Not Perfect) Formula
In contrast, Canada doesn’t tax capital gains on the sale of a principal residence—at least while it is used as such. If a property was not the taxpayer’s principal residence for the entire period of ownership, Canada applies a simple formula:
Tax-Free Portion = (# of years used as principal residence + 1) ÷ (# of years owned)
This approach provides clarity and proportionate relief, even if the home was rented out or not lived in for a period of time. It’s not without its critics, but it generally ensures that only the part of the gain attributable to non-primary use is taxable.
What Happens When You Move Abroad?
Here’s where things get tricky for both Americans and Canadians: when you move to another country, the capital gains tax exemption on your former primary residence can get muddy.
In the U.S., if you no longer meet the “2 out of 5” requirement due to living abroad, your sale could be fully taxable—even if it was your home for many years.
In Canada, moving abroad may disqualify the property from being your principal residence for future years.
For dual citizens or cross-border families, this is more than a tax issue, it’s a logistical nightmare.
The Big Questions: Is It Time for a Change?
Greene’s bill raises a larger debate: Should there be any capital gains tax on your primary residence?
Ask yourself:
- Is the current exemption of $250,000 (single) / $500,000 (married) enough, especially given home price inflation in the last decade?
- Should the U.S. raise the exemption threshold to match current housing realities?
- Should we adopt a Canadian-style formula to make the tax outcome more proportional?
- Or should we go a step further and remove the tax altogether on primary residences?
The Trade-Off: Tax Relief vs. Budget Deficits
Of course, removing this tax revenue comes with trade-offs. The Joint Committee on Taxation estimates that the current exclusion already costs the U.S. Treasury billions annually. Eliminating the capital gains tax on home sales could add to the deficit, unless offset by spending cuts or tax increases elsewhere.
Still, homeownership is often described as the cornerstone of the American dream. Supporters argue that easing the tax burden on selling your primary residence could free up housing inventory, help retirees downsize without penalty, and encourage mobility.
Proposal rarely pass in their original form, but this one reflects growing dissatisfaction with how capital gains on home sales are taxed, especially as home prices continue to soar and people live more globally mobile lives.
What do you think?
We’d love to hear your thoughts.
