The Hidden Tax Problem Impacting Today’s Homeowners

For many homeowners, rising home values have been a positive sign of long-term wealth building. But there’s another side to that appreciation that many sellers are not thinking about until they prepare to sell: capital gains taxes.

A recent report from the highlights a growing issue across the United States — home prices have risen dramatically over the past several decades, while the federal capital gains exclusion for primary residences has remained unchanged since 1997.

What Is the Capital Gains Exclusion?

When selling a primary residence, homeowners may qualify to exclude part of their profit from federal capital gains taxes:

• Up to $250,000 for single filers
• Up to $500,000 for married couples filing jointly

To qualify, homeowners generally must have lived in and owned the home for at least two of the past five years.

The problem is these exclusion limits were set nearly 30 years ago and have never been adjusted for inflation or today’s housing market.

Why This Matters Today

Since 1997, home values across the country have increased significantly. In many areas, homeowners who purchased decades ago may now have far more equity than they expected.

According to NAR’s latest research:

• Approximately 13.1 million U.S. homeowner households may already have unrealized gains above the current exclusion thresholds
• Exposure is no longer limited to luxury markets or coastal cities
• Fast-growing areas and formerly affordable markets are now seeing more homeowners impacted as values rise quickly

This creates what many economists call a “lock-in effect.”

Some homeowners delay selling because they want to avoid a large tax bill. As fewer long-term owners list their homes, inventory remains tight, making it harder for first-time buyers and move-up buyers to find available properties.

The Impact on Housing Inventory

Housing supply challenges are not only caused by a lack of new construction. Existing homeowners choosing not to move also plays a major role.

When sellers remain in homes longer to avoid taxes:

• Fewer homes hit the market
• Inventory shortages continue
• Home prices remain elevated
• Buyer competition increases

This issue is beginning to affect more than just high-cost states like California or Hawaii. Markets that experienced rapid appreciation over the last several years are now seeing the same concerns emerge.

Could the Rules Change?

There are ongoing discussions in Washington about updating the capital gains exclusion thresholds to better reflect today’s housing market.

One proposal supported by NAR, known as the “More Homes on the Market Act,” would:

• Increase the exclusion limits
• Adjust them for inflation moving forward
• Potentially encourage more homeowners to sell and free up housing inventory

At this time, no changes have officially been enacted, but the conversation around housing affordability and inventory continues to grow nationally.

What Homeowners Should Know

Not every homeowner will owe capital gains taxes when selling a home. Factors such as:

• Original purchase price
• Capital improvements
• Filing status
• Years of ownership
• Tax basis adjustments

all play a role in determining potential tax exposure.

For homeowners who have owned property for many years — especially in areas with substantial appreciation — it may be worth speaking with a tax professional before listing a property for sale.

Real estate decisions today involve much more than simply determining market value. Taxes, timing, financing, and long-term goals all matter when planning your next move.

If you are considering selling, refinancing, downsizing, or purchasing another property, having a strategy in place early can help you better understand your options in today’s market.