The Hidden Tax Trap Costing Homeowners Thousands

Through a 28-year lens, tax policies on home sales haven’t kept pace with rising home values. That’s putting homeowners in a bind and stifling real estate opportunities across the board.

Since 1997, the capital gains exclusion on the sale of a primary residence has remained unchanged at $250,000 for individuals and $500,000 for married couples. Back then, the average U.S. home cost about $145,000. Today, that same home sells for around $422,600, up a staggering 191%. But the tax break hasn’t budged, squeezing homeowners who have earned significant appreciation over decades.

Housing economists refer to this as the "Stay-Put Penalty" since tax-free profit has a capped limit, many homeowners are discouraged from selling, even after years of significant appreciation. Research shows that 34% of homeowners (about 29 million people) have already surpassed the $250,000 single-filer threshold, and over 10% have exceeded the $500,000 joint-filer cap according to a recent NAR study. That means the longer you stay, the more you’re likely to owe tax on more than the exclusion, penalizing success and freezing inventory.

In high-cost states like California and Massachusetts, this trend is even more extreme: by 2035, over 40% of homeowners in 20 states could be hit with capital gains taxes simply for having built wealth.

With long-term homeowners locked in place, there’s a ripple effect throughout the market. Inventory thins, competition heats up, and prices climb, locking out first-time buyers and families hoping to upgrade.

Meanwhile, a 2024 Gallup poll underscores real estate’s strength: Americans ranked property as the best long-term investment, ahead of stocks, gold, and bonds, for the 11th consecutive year. It’s a powerful signal: even with tax limits, Americans still trust real estate’s enduring value.

The National Association of REALTORS� is backing the bipartisan More Homes on the Market Act, aiming to:

• Double the exclusion to $500,000 for individuals and $1 million for married couples
• Index it to inflation
• Encourage more homeowners to sell without tax penalties

Homeownership should be a pathway to wealth, not a locked door. Letting equity accumulate only to tax it away runs counter to the American dream. Updating these tax rules would unlock much-needed housing stock, empower older homeowners, and open doors for younger families.

It’s time for a tax code that rewards, not restricts, the promise of homeownership.

For more information, download our Homeowners Tax Guide and IRS Publication #523.