The housing market doesn’t operate in a vacuum—and tax policy has been quietly steering its course. Since early 2021, as home prices surged and supply struggled to keep up, federal tax reforms have played a bigger role than many realize. Changes to deductions, capital gains rules, and investment incentives have reshaped decisions on everything from where people settle down to how long they hold onto a property. For investors and everyday buyers alike, the new tax landscape is changing what smart real estate strategy looks like.
Historic Surge in Home Prices (2021–2023)
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The early 2020s saw an unprecedented surge in U.S. home prices, driven by low interest rates, pandemic-related shifts in housing demand, and limited supply. In 2021, home values rose faster than ever recorded. The median sales price for an existing home in 2021 was about $346,900 – up a whopping 17% from 2020.
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In dollar terms, the typical homeowner gained roughly $50,000 in home equity in a single year. This rapid appreciation created significant housing wealth for existing homeowners but made it harder for first-time buyers to afford a home. The National Association of Realtors noted that the 2021 price increase was a record, even exceeding the pace of the mid-2000s housing boom.
The key culprit was a major housing shortage: by December 2021, the number of homes for sale hit a record low, with buyers far outnumbering available listings.
Pandemic’s Effect on Housing Demand
The COVID-19 pandemic also influenced market trends. With millions of people transitioning to remote work, many sought larger homes or properties in suburban areas, further boosting demand for housing. At the same time, construction of new homes lagged behind.
The United States has been underbuilding housing for years, but it became more acute as demand spiked. Freddie Mac economists estimate the nation had a housing supply shortfall of about 3.8 million units as of 2020, which only modestly improved to 3.7 million units by late 2024.
Moderation in Price Growth
Home price trends have started to moderate since the frenetic peak of 2021. The Federal Reserve began raising interest rates in 2022, which pushed typical mortgage rates from around 3% up to 6–7% by 2023. Higher borrowing costs cooled buyer demand and caused home price growth to slow.
By 2023–2024, the market saw far smaller price increases – and in some months, prices even dipped slightly in many areas. As of early 2025, the median U.S. home price was roughly $417,000, slightly lower than a year earlier. Industry forecasts anticipate a flattening or small decline in home values in 2025 (on the order of a 1–2% drop) as high mortgage rates and rising inventory give buyers more bargaining power.
Capital Gains Taxes and Investment Behavior
Capital gains tax policy is a crucial consideration for real estate investors and home sellers. When you sell a property for a profit, the profit is generally subject to capital gains tax. Since 2018, long-term capital gains on assets have been taxed at preferential rates of 0%, 15%, or 20% depending on income, plus an additional 3.8% Net Investment Income Tax (NIIT) for high earners.
For example, a landlord or flipper with a large gain might pay up to 23.8% tax federally on their real estate profits under current law. Homeowners who sell their primary residence often qualify for a special exclusion (up to $250,000 of gain is tax-free for single filers, $500,000 for married couples), a long-standing benefit that continues to encourage homeownership as an investment.
Proposed vs. Enacted Tax Changes
Since January 2021, there have not been major changes enacted to capital gains tax rates for real estate, but significant changes were proposed and widely discussed. Early in the Biden administration, as part of the American Families Plan, there was a proposal to nearly double the top federal capital gains rate for wealthy individuals, effectively raising it to 43.4% for those with over $1 million in income.
However, Congress did not pass this increase. The proposal met resistance and ultimately was not included in the final legislation. As a result, the top long-term capital gains tax rate remained at 20% (23.8% with NIIT) for the highest earners.
Real estate investors were also closely watching proposals to change the 1031 like-kind exchange rules. A like-kind exchange allows investors to defer capital gains taxes when they sell an investment property, so long as they reinvest the proceeds into another qualifying property within certain timeframes.
In 2021, the administration proposed capping the deferred gain in 1031 exchanges at $500,000 per taxpayer per year. Any gains above that cap would be taxed in the year of the exchange. Once again, however, this reform was not enacted into law. The like-kind exchange rules for real estate have remained unchanged.
Ongoing Tax Benefits for Investors
Other tax benefits for investors introduced earlier continued to play a role. For example, the 2017 law’s creation of a 20% Qualified Business Income (QBI) deduction can apply to rental income for many landlords, effectively reducing the taxable income from rentals by one-fifth in many cases.
Combined with depreciation write-offs and other deductions, many real estate investors are able to significantly shelter their rental income from taxes, making investment properties more attractive. These provisions – unchanged since 2018 – continue to benefit rental owners by lowering the effective tax rate on rental earnings.
Looking ahead, the issue of capital gains taxes on real estate is not settled permanently. The current tax rates are scheduled to remain until at least 2025, when many provisions of the 2017 tax law expire.
Mortgage Interest and SALT Deduction Limits
While capital gains taxes affect sellers and investors, annual tax deductions affect the day-to-day cost of owning property. A major tax reform that predates 2021 – but continues to shape the market – is the limitation on mortgage interest and state and local tax (SALT) deductions implemented by the 2017 Tax Cuts and Jobs Act.
Under current law, homeowners who itemize deductions can deduct interest on up to $750,000 of mortgage debt for loans taken out since 2018. Similarly, the deduction for state and local taxes – which includes state income taxes and property taxes – is capped at $10,000 per year from 2018 through 2025.
These limits were part of a broader tax reform trade-off that also substantially raised the standard deduction (now $27,700 for a married couple in 2023). As a result, only about 10% of taxpayers currently itemize deductions at all, since the majority take the standard deduction.
Impact on High-Tax Areas
The $10,000 SALT deduction cap in particular has had a pronounced effect on homeowners in high-tax, high-property-value areas. In states like New York, New Jersey, California, and Illinois, it’s not uncommon for a homeowner to pay well over $10,000 just in property taxes, not to mention state income taxes.
Economic analyses indicate this has put downward pressure on home values in affected areas. A working paper published by the Office of the Comptroller of the Currency in 2021 found that by increasing the after-tax cost of owning expensive homes, the SALT cap led to significantly slower home price growth in counties with high SALT exposure.
In high-tax counties, annual home price appreciation was about 0.79 percentage points lower on average due to the SALT cap. For the most expensive homes in those high-tax counties, the effect was even larger – their price growth rate was cut by roughly 0.95 percentage points per year.
Differential Impact on Owners vs. Investors
An important and sometimes overlooked nuance is that the SALT deduction cap applies to personal taxes, but not to business expenses. For instance, if a homeowner owns a second home purely for personal use, the property taxes on that second home count against the $10k cap.
But if an investor or landlord owns a property, the property taxes on a rental property are deductible as a business expense on Schedule E, not as an itemized SALT deduction – and thus are not subject to the $10,000 cap.
In other words, a large corporate landlord can fully deduct the property taxes on all the homes they own as a cost of doing business, whereas a homeowner can deduct only a fraction of their property tax bill if it exceeds the cap. This discrepancy means that in high-tax states, owner-occupants lost some tax advantage, while rental owners did not.
The mortgage interest deduction limit ($750,000 of loan principal) likewise mainly affects buyers of high-priced homes. If you buy a home and take out a $1 million mortgage today, only the interest on the first $750k is deductible.
Institutional vs. Individual Investors: Who’s Buying Homes and Why
One of the notable trends in the housing market since 2021 has been the surge of institutional investors buying residential properties. Low interest rates, rising rents, and the relatively favorable tax environment for businesses helped fuel a wave of investor activity.
By late 2021, investors – which can include large corporations, Wall Street-backed investment firms, local real estate companies, and individuals operating via LLCs – were purchasing homes at record levels. According to real estate brokerage Redfin, investors bought 18.4% of all U.S. homes that sold in the fourth quarter of 2021, the highest quarterly share on record.
This was up from about 12.6% in the same quarter of the previous year. In raw numbers, investors bought over 80,000 homes in just Q4 2021, a huge jump compared to roughly 56,000 in Q4 2020. Essentially, nearly one in five homes sold at the end of 2021 went to an investor, not an owner-occupant.
What Drove Investor Activity?
What was driving this investor surge? A combination of factors. First, rents were soaring, making the prospect of buying homes to rent out extremely attractive. At the end of 2021, rents on new leases were about 14% higher than a year prior on average.
Second, many investors were flush with cash – in fact, more than three-quarters (75%) of investor home purchases in Q4 2021 were all-cash deals. Big investment firms often raise capital from institutional funds, and smaller investors may have tapped into savings or other sources, allowing them to outcompete regular homebuyers who rely on mortgages.
Tax Advantages for Institutional Buyers
Tax considerations also give institutional investors some advantages. Investors can deduct their expenses (mortgage interest, property taxes, maintenance, depreciation) from rental income, often significantly reducing or eliminating current taxable income from the property.
Depreciation, in particular, is a powerful shelter – it’s a paper expense that assumes the building’s value shrinks each year for tax purposes (even if in reality the property is appreciating). This can make a profitable rental property show little taxable profit. Individual homeowners don’t get anything similar.
It’s not just large corporations – “mom-and-pop” investors also ramped up purchases. But evidence shows the big players were especially aggressive in certain markets. The White House noted that in the first half of 2021, one of every six home purchases was by investors, and in some markets it was as high as one in four.
Recent Changes in Investor Activity
Starting in 2022 and into 2023, investor purchases did slow down from the 2021 peak. This was largely due to higher interest rates and cooling home values, rather than any tax changes. By the third quarter of 2024, Redfin reported that investors bought about 16% of homes sold – the lowest investor market share since late 2020.
Many highly leveraged investors pulled back when financing costs rose and when home price growth stalled. Some institutional buyers also hit pause to assess the changing market dynamics. Nonetheless, the overall presence of investors in the housing market remains much higher than it was a decade ago.
Tax Incentives for Housing Supply and Affordable Development
Another critical angle is how tax policy has been used to address the housing supply crunch and affordability issues. While private investors were buying up existing homes, the federal government has pushed for tax-driven initiatives to encourage the construction and preservation of affordable housing.
A cornerstone of federal housing policy is the Low-Income Housing Tax Credit (LIHTC). Created in 1986, LIHTC offers tax credits to developers who build or rehabilitate rental housing that is affordable to low-income households.
Recognizing the severe shortage of affordable rentals, the current administration has sought to expand LIHTC. President Biden’s FY2024 budget proposal called for a $37 billion expansion of the Low-Income Housing Tax Credit over 10 years. This would include increasing the allocation of credits each state receives, as well as lowering the “50% test” for private activity bonds to 25%.
According to the administration, these LIHTC enhancements could build or preserve an additional 1.2 million affordable rental units over the next decade.
New Proposals for Homeownership
Another bold idea in the administration’s housing agenda is the Neighborhood Homes Tax Credit (NHTC), sometimes called the Neighborhood Homes Investment Act. This would be a new federal tax credit to encourage building or rehabbing homes for owner-occupancy in distressed communities.
The proposed credit would cover the gap between development costs and market price by offering a credit to developers equal to the difference. The budget proposal allocates $19 billion for this credit over 10 years. It’s projected to support the construction or rehab of 500,000 homes in low-income areas if implemented.
The administration has also floated consumer-facing housing tax credits: notably, a First-Time Homebuyer Tax Credit (often mentioned as $15,000 during Biden’s campaign, later shaped as $10,000 in policy proposals) and a credit for owners who sell to first-time buyers.
Energy-Efficient Housing Incentives
One area where a tax change was enacted is in the realm of energy-efficient housing. The Inflation Reduction Act of 2022 included extensions and expansions of tax credits for green building and energy efficiency.
For example, the Section 45L tax credit for energy-efficient new homes was not only extended through 2032 but increased: builders can now get up to $2,500 or $5,000 per home for new single-family homes or multifamily units that meet high efficiency or zero-energy ready criteria.
Effects on Renters and Rental Prices
Tax reforms often target homeowners and developers, but renters are impacted indirectly by how tax policies influence landlords, housing supply, and costs passed through. In the last few years, renters have faced steep challenges, with rents rising faster than incomes in many areas.
From 2021 through 2022, the country saw record-high rent inflation. As noted earlier, asking rents for new leases jumped by double digits – around 14% year-over-year by the end of 2021. Even through 2022, rents kept climbing in most cities. By early 2023, rent growth began to moderate.
As of March 2025, rents were about 34.7% higher than they were before the pandemic (2019) on a national level. This means renters, especially those who moved or signed new leases, are paying one-third more than just a few years ago for the same unit on average.
Tax Policy’s Indirect Effects on Rental Markets
How do taxes play into this? One angle is that landlords’ tax expenses (or savings) can affect rent levels. For instance, the SALT cap and lower mortgage interest deduction don’t apply to rental business costs, which actually helps keep landlords’ costs lower than they otherwise would be.
For renters, the most promising aspect of recent tax policy is the push to increase affordable housing via tax credits. LIHTC and similar programs specifically create below-market rent units. If the LIHTC expansion succeeds in building hundreds of thousands of extra affordable units, that directly benefits low-income renters who can occupy those homes at controlled rents.
Rent growth has already slowed as more new apartments come online – by early 2023, national rent growth was running below its pre-pandemic average, and by 2024 it was around 3-4% annually. In many cities, a significant number of multifamily units were under construction in 2022 and 2023.
As those units open, vacancy rates have ticked up a bit, causing landlords to temper rent hikes and even offer concessions (in March 2025, about 40% of rental listings on Zillow offered some form of concession or discount to new tenants).
Future Outlook
As we look ahead, the interaction between tax policy and the housing market will continue to evolve. The period since 2021 underscores a few key takeaways:
Tax Policy and Capital Flows
Tax reforms have consequences for where capital flows. The relative stability of investor-friendly tax provisions helped encourage a lot of money into housing during the boom. If these were to change – for example, if a future budget deal raised capital gains taxes or imposed limits on deferring real estate gains – we could see a shift, with investors becoming more cautious.
Currently, no major tax hikes on real estate investors have been enacted, but the expiration of the 2017 cuts in 2025 looms. Many expect that there will be negotiations in Congress around that time, which could revisit things like the top income and gains rates, the 1031 rules, and more.
The Future of the SALT Cap
Homeowners in high-tax areas are eagerly watching the fate of the SALT cap. If the cap sunsets after 2025, it would effectively hand a tax cut to many upper-middle-class homeowners and possibly boost housing demand in those areas. If instead the cap is extended or made permanent, those markets will continue to carry that slight weight on them.
Until 2025 the cap remains, so in the short term we likely see a continuation of current trends: people factor in that extra cost when buying in pricey suburbs, and some may opt for lower-tax states as an alternative.
Housing Supply and Affordability Challenges
Housing supply is finally responding to high prices, but will it be enough? The market is cyclical, and the surge in construction we saw in 2022–2023 (with a 50-year high in multifamily units under construction) is expected to translate into more inventory by 2024–2025.
If inflation continues to come down and mortgage rates ease somewhat, we could see a revival of home sales activity. Zillow projects existing home sales to rise about 3.3% in 2025, after a sluggish 2024. More sales could mean a bit more liquidity and opportunity for both buyers and sellers.
Affordability remains a central challenge. By many metrics, housing in 2025 is less affordable than it has been in decades – not just because of high prices, but also due to high interest rates. Although prices have plateaued, an average home at a 7% mortgage rate can cost more per month than that same home would have at a 3% rate even if the price was much lower.
In conclusion, the period since January 2021 has been a dynamic one for residential property investment. The federal tax reforms actually enacted during this time were relatively modest in scope, but their impacts are significant when accumulated: investors continued to benefit from generous tax provisions, homeowners in certain places felt the pinch of capped deductions, and resources were marshaled to try to tackle the housing shortage through tax credits.
For now, buyers, sellers, and investors must navigate a landscape where home prices are high but not surging, mortgage rates are elevated, and tax rules are largely steady. What happens after 2025, when many tax provisions are set to expire, will be crucial in determining the next phase of the housing market.
References
- Home prices rose faster than ever in 2021. The typical home gained $50,000 in value – NPR
- The Impact of the State and Local Tax (SALT) Deduction Cap on U.S. Home Prices – Office of the Comptroller of the Currency
- Investors Buy Record Share of Homes in 2021, Increasing Rental Prices – National Low Income Housing Coalition
- Real Estate Investors Are Buying a Record Share of U.S. Homes – Redfin
- FACT SHEET: Biden-Harris Administration Announces Immediate Steps to Increase Affordable Housing Supply – The White House
- FACT SHEET: The President’s Budget Cuts Housing Costs, Boosts Supply, and Expands Access to Affordable Housing – The White House
- Economic, Housing and Mortgage Market Outlook – November 2024 | Spotlight: Housing Supply – Freddie Mac
- Zillow Home Value and Home Sales Forecast (April 2025) – Zillow Research
- How the New Limit on SALT Deductions Affects Homeowners – Porte Brown CPAs
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