Higher Home Values Mean Higher Taxes. Who’s Paying the Most?

A large tax exemption enjoyed by many American home sellers for the past 27 years has been losing steam recently, according to a new study by CoreLogic.

IRS rules allow couples to avoid taxation on up to $500,000 in capital gains — or profit, in lay terms — when selling their primary residence. (The threshold for single filers is $250,000.) The costs of improvements to the home can be subtracted from gross capital gains, but if what remains is still over that $500,000 limit, it is taxed up to 20 percent, depending on the owner’s income.

Thanks to huge increases in the value of homes since 2021, with sellers making double or triple what they paid, ever more sales are triggering the capital gains tax.

From 2000 through 2003, only about 1.3 percent of home sales (some 38,000 in all) resulted in capital gains exceeding $500,000, potentially triggering the tax. In 2023, about 8 percent of sales (roughly 230,000) did.

It may be hard to muster much sympathy for a couple who suddenly has to pay capital gains taxes because they pocketed over half a million dollars on their home sale. It’s a tad easier when you consider that, unlike other tax provisions, this exemption is not adjusted with inflation. A $500,000 profit when the law was introduced in 1997 is equal to only about $262,000 today, according to the study. The diminished value of the benefit, combined with today’s high interest rates and home prices, cuts into sellers’ profits, leaving less in hand to purchase their next home.

Expensive areas naturally have seen more home sales with gross profits over $500,000. California has been a standout: From 2017 through 2023, it was home to 10 percent of all U.S. home sales, yet 37 percent of all the sales above the exemption threshold. Several other states, including Hawaii, Colorado and New Jersey, also saw double-digit increases in the share of sales over the $500,000 threshold during Q4 2023, as shown in this week’s chart.

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