The steep rise in U.S. home prices over the past decade has boosted wealth for millions of homeowners but also increased the likelihood of facing federal capital gains taxes on home sales. According to the National Association of REALTORS® (NAR), nearly 29 million households are close to reaching the “capital gains cliff,” where profits exceed IRS exemption thresholds. Current estimates suggest that 10–15% of sellers could surpass these limits in the coming years.
The IRS exemption limits $250,000 for single filers and $500,000 for married couples filing jointly have remained unchanged since 1997. At that time, the median U.S. home price was around $145,000. By the first quarter of 2025, it had climbed to approximately $423,000, almost three times higher. This rapid appreciation has put particular pressure on sellers in expensive metropolitan markets where gains can easily breach the threshold.
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How the Capital Gains Tax Works for Homeowners
Capital gains occur when a property is sold for more than its purchase price. For homes owned for over 12 months, these gains are taxed at the long-term capital gains rate, which is lower than regular income tax. Rates are determined by taxable income and filing status.
| Filing Status | 0% Rate Income Range | 15% Rate Income Range | 20% Rate Threshold |
|---|---|---|---|
| Single | Up to $47,025 | $47,026 – $518,900 | Over $518,900 |
| Married Joint | Up to $94,050 | $94,051 – $583,750 | Over $583,750 |
In addition to federal taxes, many states impose their own capital gains levies. State rates range from 2.5% to over 10%, with California topping the list at 13.3%, adding a significant cost for sellers in high-tax states.
The IRS Exclusion for Primary Residences
Homeowners selling their primary residence can exclude a portion of the profit if they have lived in the home for at least two of the last five years. This exclusion is $250,000 for single filers and $500,000 for married couples filing jointly. The two years need not be consecutive, and only one spouse must meet the residency requirement for joint filers.
| Filing Status | Maximum Exclusion |
|---|---|
| Single | $250,000 |
| Married Joint | $500,000 |
Who Is Most Likely to Be Affected?
NAR data identifies several high-risk groups:
- Long-term owners in high-value markets such as San Francisco, Los Angeles, and New York City.
- High-income households taxed at the top 20% capital gains rate.
- Single or separate filers with the lower $250,000 exemption.
- Owners with minimal home improvements, keeping the cost basis low.
Equity vs. Taxable Profit
Having high equity does not always mean owing a large tax bill. Equity is the difference between the market value and mortgage balance, while taxable gain is the sale price minus the adjusted cost basis — the purchase price plus qualifying improvements and eligible selling costs. A homeowner with $600,000 in equity may have a much smaller taxable gain after adjustments.
Strategies to Reduce Liability
Homeowners can reduce or avoid the tax by filing jointly to access the higher exclusion, maintaining records of home improvements to increase the cost basis, and timing the sale to meet the residency rule. These measures can significantly reduce taxable profits.
Legislative Outlook
Some lawmakers and industry groups have proposed raising or eliminating the capital gains tax on primary residences. Supporters say it would better reflect today’s housing prices and encourage market activity. Critics warn the change could mainly benefit wealthier households while reducing government revenues. With no adjustments yet made, more sellers are likely to face the hidden home equity tax in the years ahead.