Cap-gains lock-in effect creeps inland: watch SD, WV listings

Home prices have soared over the past few years, which has incidentally constrained inventory due to a tax limit set in the 1990s. 

At least 10% of homeowners in seven states pay capital gains taxes, which can be as high as 20%, on the profits they make from the sale of their home, according to a new report from Cotality. In 2025, 8.1% of existing homes sales nationally saw capital gains exceed $500,000, and were thus subjected to the tax, up from 2.1% in 2019.

"Homeownership continues to be a cornerstone of wealth-building, yet stagnant capital gains thresholds are increasingly influencing how - and when - homeowners can access those gains," said Archana Pradhan, principal economist at Cotality.

Home values have increased 147% over the last 15 years, pushing more homeowners above the capital gains tax exemption threshold of $250,000 for single filers and $500,000 for married couples. A quarter of California homeowners pay capital gains taxes, followed by Hawaii at 21% and Washington at 19%, the report found.

California has some of the lowest affordability in the country, and Hawaii has a median home price of $735,000, compared to the national average of $417,450. Nearly 20% of homeowners in Washington pay capital gains taxes, yet the typical home sells for nearly $100,000 less than in California and Hawaii, suggesting home prices have made significant strides in a short period, according to the report.

Pressure remains in states where capital gains on home sales are still rare. South Dakota saw the number of homeowners paying capital gain taxes double in two years, while West Vriginia moved up four spots in the rankings, as the trend is spreading beyond the coast, the report found. 

The consequence of this is a growing number of homeowners who are wealthy on paper but constrained in practice, creating a lock-in effect, Cotality said. Rather than relocate, downsize or time their retirement as planned, many homeowners are staying put, which limits inventory for buyers and distorts mobility patterns across the market.

What is being done?

The home sale tax exclusion has not been updated since 1997, prompting discussions among industry experts and advocates. The More Homes on the Market Act was introduced in the House of Representatives last February as a result. Under the bill, the tax exemption thresholds will double for single filers and married couples to $500,000 and $1 million, respectively. The bill also requires these amounts to be adjusted annually for inflation.

Evan Liddiard, National Association of Realtors director of federal tax policy, said at the Realtors Legislative Meetings in June that doubling the home equity exclusion is reason enough to support the bill.

"This is about people who want to move," he said. "We have families that need to size up their homes but don't have access because this tax is locking up inventory."

The bill has bipartisan support, but there continues to be skepticism, NAR said.