Housing affordability continues to be a dominant issue in 2026. Recent national headlines highlighted that President Donald Trump called for a ban on large institutional investors from purchasing single-family homes, framing it to make homeownership more accessible for Americans.
But while such proposals generate significant public attention, banning institutional buyers alone won’t fix the housing shortage. A far more effective solution would be to reform Internal Revenue Code Section 121 (the capital gains exclusion on the sale of a primary residence) to unlock existing housing inventory and give more Americans the opportunity to buy.
The Housing Inventory Shortage Is the Core Issue
America’s housing market in 2026 continues to struggle with chronic housing supply shortages due to:
- Years of underbuilding
- Zoning and permitting barriers
- Rising construction costs and labor shortages
- Inflation and limited resale inventory
Restricting who can buy homes does not increase supply; it only changes who competes for the limited homes already on the market. True affordability requires more homes for sale not just fewer buyers competing for them.
What President Trump Called for and Why It Matters
In early 2026, President Trump used social media and public statements to say he would ban large institutional investors from buying single-family homes, asserting that such a step would help improve housing affordability and expand opportunities for homebuyers.
While this proposal is timely and politically resonant, it does not directly expand the housing supply or encourage more homeowners to list their houses for sale. In fact, restricting certain buyers might inadvertently reduce market liquidity and slow housing turnover — precisely the opposite of what’s needed to make homes more affordable.
The Lock-In Effect: Why Homeowners Don’t Sell
One of the most significant but often overlooked issues in the housing market is the capital gains “lock-in effect” created by outdated rules in IRC Section 121.
Today, homeowners can exclude:
- $250,000 in capital gains if single
- $500,000 if married filing jointly
These thresholds were set in 1997 and have not kept pace with decades of home price appreciation. Many homeowners now have equity well above these limits. If they sell, they would face tax liabilities that make moving prohibitively expensive.
As a result, many homeowners:
- Don’t downsize after retirement
- Don’t relocate for family or work
- Don’t sell to enter retirement communities
- Don’t free up homes for move-up buyers or first-time buyers
This lock-in effect keeps millions of existing homes off the market and tightens inventory across all price ranges.
How Reforming Section 121 Would Increase Housing Inventory
Updating or expanding the primary residence capital gains exclusion would:
- Encourage long-time homeowners to sell
- Increase turnover of existing inventory
- Reduce tax penalties for moving to a new home
- Free up housing for both entry-level buyers and move-up buyers
This is where bipartisan policy action, like the proposed “More Houses on the Market Act” introduced by Representatives Mike Kelly and Jimmy Panetta, could make a real impact by modernizing the Section 121 exclusion. Reforming these limits aligns with broader efforts to get more homes on the market and promote housing mobility.
House Passes the Housing for the 21st Century Act
In February 2026, the House passed the Housing for the 21st Century Act, a bipartisan package aimed at boosting housing supply and affordability. The legislation touches on zoning reform, access to capital, community development, and permitting modernization. These are important long-term fixes.
However, none of these supply-side reforms immediately unlock the millions of homes already owned but not listed for sale due to tax hurdles. Addressing the lock-in effect in Section 121 would do that.
What Lawmakers Are Talking About in 2026
A February 10th hearing by the House Financial Services Committee, titled “Priced Out of the American Dream: Understanding the Policies Behind Rising Costs of Housing and Borrowing,” underscored the complexity of housing affordability. Lawmakers discussed:
- Housing supply shortages
- Borrowing and mortgage costs
- Zoning and permitting reform
- Federal housing programs
- Capital access and community development
Both sides of the aisle acknowledged that supply side issues, not just demand-side restrictions, are central to solving affordability. This reinforces that smart market policy must expand inventory rather than simply limit who can buy homes.
Why Banning Institutional Buyers Alone Isn’t Enough
Even if a ban on large investors were enacted:
- It would not create new homes for sale
- It would not address why millions of existing homeowners are not listing their homes
- It could reduce liquidity in some markets
- It might diminish potential buyers who refurbish and return homes to the market
Policies aimed at housing affordability should encourage market participation, not limit it without compensating benefits.
The 1031 Exchange Perspective: Unlocking Economic Mobility
From a real estate investment standpoint, tools like Section 1031 exchanges enable investors to defer capital gains when reinvesting equity into new properties. This promotes liquidity and reinvestment, sustaining market activity.
Similarly, reform of Section 121, by reducing tax penalties on the sale of primary residences, would encourage homeowners to sell and reinvest in housing that better fits their life stages. Both reforms incentivize market mobility rather than freezing ownership based on tax consequences.
The Bottom Line for Housing Policy in 2026
Banning large institutional buyers, as President Trump has suggested, captures attention, but it does not solve the housing inventory crisis.
Real solutions lie in unlocking existing housing stock:
- Modernize the Section 121 capital gains exclusion
- Promote voluntary turnover of existing homes
- Remove tax barriers that trap homeowners in place
If policymakers want to expand access to homeownership and improve affordability, they must focus on solutions that increase supply not simply restrict buyers.
1031 CORP. cannot provide tax or legal advice, but our knowledgeable Exchange Team is here to educate Exchangers and work with their advisors.
