The home equity tax is a fee imposed by the IRS when selling a property, originally designed to protect middle-class homeowners from being taxed as if they were wealthy.
However, the law has not been updated since 1997, resulting in single seniors being able to exclude only up to $250,000 in capital gains from selling their primary residence, while married couples can exclude up to $500,000.
Although these amounts may seem substantial, they pale in comparison to the appreciation in home values over the past 28 years. In 1997, the median U.S. home price stood at $145,000, whereas today it has soared to $360,239.
Realtor.com points out that if the law had kept up with inflation, the exclusion cap would be much higher today, around $660,000 for individuals and $1.32 million for couples.
The home equity tax impacts all sellers, but it particularly affects older Americans due to their longer homeownership tenure.
Seniors are disproportionately affected by this issue because of the timing of their homeownership. Many have lived in their homes for decades, accumulating significant equity over time. Moreover, a large number of them have already paid off their mortgages, leaving little debt to offset the gains.
Ironically, states with high property values and robust long-term house-price appreciation are where home sellers face the greatest tax burden.
The top five states with the highest average senior tax liability on home sales, as per Realtor.com, are:
- Wyoming: $105,201
- Hawaii: $91,664
- California: $86,215
- Washington, D.C.: $82,721
- New York: $70,493
Unless the law is revised to align with current market conditions, the tax liability upon selling will erode a significant portion of the home equity that middle-class owners, including seniors, rely on.
According to a recent study by the National Association of Realtors, over 8 million homeowners exceed the $500,000 cap. By 2030, eight states are projected to have over 40% of their homeowners with equity surpassing the cap, with that number rising to 20 states by 2035.
NAR estimates that 29 million homeowners currently (34%) may face capital gains taxes if they sell with equity above the $250,000 exclusion cap, a figure expected to increase to 59 million (70%) in a decade.
Fortunately, there may be relief in sight. President Donald Trump recently expressed interest in legislation that would eliminate capital gains taxes on primary residences, a proposal put forth by Congresswoman Marjorie Taylor Greene (R-Ga.).
Republicans offered homeowners in affluent areas some respite this year with the One Big Beautiful Bill Act, which raised the cap on state and local taxes to $40,000 from $10,000.