Capital Gains Tax Changes May Raise Rents
Property industry groups are warning that any reduction in the capital gains tax discount could lead to rent increases. The argument posits that investors would pass the higher tax burden on to tenants to maintain their returns. While the debate is at the federal level, it represents a significant policy risk that could impact rent dynamics in Chicago.
- Under current U.S. federal law, profit from selling a rental property held for more than one year is typically taxed at long-term capital gains rates of 0%, 15%, or 20%, depending on the investor's income. This is a lower rate than for short-term gains, which are taxed as ordinary income at rates up to 37%. - At the federal level, several bills have been introduced to alter capital gains taxes on real estate. The "More Homes on the Market Act" proposes doubling the current primary residence exclusion to $500,000 for individuals and $1 million for joint filers and indexing it to inflation, while the "Don't Tax the American Dream Act" seeks to eliminate the tax on primary home sales entirely. - The National Association of REALTORS® argues the current $250,000/$500,000 capital gains exclusion for primary residences, unchanged since 1997, creates a "lock-in effect." This effect discourages homeowners, including potential landlords, from selling properties, which in turn suppresses housing inventory. - A study analyzing capital gains tax changes in Israel found that when tax exemptions encouraged investors to sell their rental properties, it led to a decrease in home prices but a 10% increase in rents for new leases. The study suggests that a reduction in the rental housing supply can drive up rental costs. - The debate over federal tax policy comes as Chicago's luxury rental market anticipates the delivery of new high-end apartment buildings in 2026, including office-to-residential conversions in River North and new constructions in Fulton Market, increasing competition for tenant acquisition. - Chicago landlords are already facing increased local tax burdens that affect operating costs. The city's Personal Property Lease Transaction Tax, which applies to the rental of some personal property, was increased to 15% at the start of 2026. - As of January 2026, the median rent in the Chicago metro area was approximately $1,967 per month, a 2% year-over-year increase, with prices remaining at historic highs. This existing market pressure provides a backdrop for any potential pass-through of new costs to tenants.
