The “Phantom Gain” Conversation

What Indexing Capital Gains to Inflation Could Mean for Homeowners

If you've owned your home for a decade or more, you already know the capital gains number that shows up when you imagine selling it can feel almost unreal. A home purchased in the mid-2000s or early 2010s in Santaluz, Rancho Santa Fe, or along the coast has likely appreciated by hundreds of thousands, if not millions of dollars. Some of that is genuine, market-driven appreciation. But a meaningful piece of it is something else entirely: the dollar simply buys less than it used to.

That distinction is at the heart of a tax policy conversation that the National Association of Realtors has lobbied in favor of for years and which has resurfaced in Washington this year. It's a conversation we think our clients, particularly those sitting on long-held, highly appreciated properties, would like to know about.

What “Indexing to Inflation” Actually Means

Under current law, capital gains are calculated the simple way: sale price minus original purchase price (your "cost basis"), with certain adjustments for improvements. If you bought a home for $2 million and sell it today for $4 million, your taxable gain is $2 million, regardless of how much of that increase simply reflects a weaker dollar versus real appreciation.

Indexing capital gains to inflation would change that math. Your original cost basis would be adjusted upward to reflect inflation from the date of purchase, before the gain is calculated. The idea, as its proponents frame it, is that you should only be taxed on your real profit, not on "phantom gains" created by inflation alone.

The concept isn't new. It has surfaced in policy debates going back decades, most recently gaining renewed attention in 2026, when a group of senators pressed the Treasury Department to consider implementing it, either through legislation or, more controversially, through executive regulatory action. As of this writing, it remains a proposal, not law. Whether Treasury has the legal authority to make this change without Congress is itself an open and contested question, and most tax analysts expect any resolution to take time.

Why This Matters in a Market Like Ours

For most primary-residence sellers, the existing home-sale exclusion already shelters up to $250,000 in gain for single filers, $500,000 for married couples, provided ownership and use tests are met. For some homeowners, that exclusion alone covers the entire gain but not for most San Diegan’s who have held their property for a decade or two.

In the luxury segment, and especially for long-held properties, second homes, or investment real estate, gains frequently exceed that threshold by a wide margin. A family who purchased in Santaluz or Fairbanks Ranch in the early 2010s and is now considering a sale may be looking at a taxable gain well into seven figures — a portion of which reflects nothing more than the difference between a 2012 dollar and a 2026 dollar. Indexing would shrink that taxable figure, potentially by a substantial amount, depending on how long the property has been held and how the policy is ultimately structured.

The Debate, Both Sides

We think it's worth understanding the debate. Supporters, of the proposal argue it corrects a genuine unfairness: taxing inflation itself was never the intent of capital gains policy, and doing so discourages people from selling long-held assets, a phenomenon economists call the "lock-in effect."

Critics, point out that the benefit is heavily concentrated at the top of the income scale, by some estimates, the large majority of the tax savings would flow to the wealthiest households and that the policy would meaningfully reduce federal revenue, with cost estimates ranging from roughly $170 billion to nearly $1 trillion over a decade, depending on whether it applies only prospectively or to gains already accrued.

There are also open technical questions, including how the change would apply to properties owned in trusts, LLCs, or by foreign nationals and expats.

None of this is settled. It's a live debate, and it may remain one through the midterms and beyond.

What We're Telling Clients Right Now

Nothing has changed under current law. If you're weighing whether to sell a highly appreciated property, that decision should be grounded in today's rules, your own cost basis, and a conversation with your CPA or tax attorney, not in speculation about legislation that may or may not pass. We are not tax advisors, and this isn't tax advice; it's context we think matters for anyone holding significant, long-term equity in San Diego County real estate.

What we can tell you is this: understanding your true cost basis, tracking capital improvements carefully, and knowing exactly where you stand today puts you in the strongest possible position, whether this policy changes or it doesn't. If you'd like to talk through where the market stands for a property like yours, we're always glad to have that conversation.

The Gloria Shepard Team | Compass

This article is provided for general informational purposes only and does not constitute tax, legal, or financial advice. Please consult a qualified tax professional regarding your specific circumstances. Policy details current as of August 2026 and subject to change.