In a lot of markets this absolutely hits the "moderately wealthy trying to leave the working class". Bay Area houses that went for $1.2M in 2009 now go for about $3M, for a gain of $1.8M. That's well over the $500K exclusion, even including capital improvements.
Few folks will shed a tear for people who own a $3M house simply by virtue of living in a hot area, but that's exactly who the OP is talking about.
Just because middle class people benefit from the subsidy of low interest rates that create asset bubbles does not mean that the people who raised families in a neighbourhood or a city are somehow undeserving of the rewards on their equity.
The idea that money not taken in taxes is an "expenditure," or an advantage, and this idea of accounting for the hypothetical opportunity cost of not taking some peoples money as a tax privilege is bizzare.
Yikes. Do you really think places like SOMA, SLU, DTLA, etc. got better because rich people brought their 'culture' there? I'd recommend you visit said places and see for yourself, most of the 'culture' is in adjacent (usually historically minority) neighborhoods.
These are the people that brought their culture. Their housing is probably also well appreciated.
Investments of all kind receive generous tax breaks even when they're simple rent seeking.
So you get the triple whammy of unaffordable prices with unaffordable rents with downward pressure on wages - because the rent-seeking behaviour of share holders is privileged over the value of the work that underpins it.
It's not just a recipe for economic disaster for most of the population, it's also a recipe for political instability. In a democracy everyone should feel like the system is working in their interests.
When essentials become unaffordable and pricing becomes punitive and extortionate, people get angry and start to act in insane ways.
The idea of taxing this "profit" for the home owner would be insane. The investment and re-investment in real-estate drives a big majority of the economy.
I'm for modifying 1031 for investors who rent their properties. \
It’s a huge tax advantage for homeowners. One could argue that it is in itself unfair as it advantages people who already have large assets over those who do not.