{"id":2215,"date":"2025-08-10T20:52:45","date_gmt":"2025-08-10T20:52:45","guid":{"rendered":"https:\/\/ft365.org\/index.php\/2025\/08\/10\/whos-afraid-of-the-hidden-home-equity-tax-bankrate\/"},"modified":"2025-08-10T20:52:45","modified_gmt":"2025-08-10T20:52:45","slug":"whos-afraid-of-the-hidden-home-equity-tax-bankrate","status":"publish","type":"post","link":"https:\/\/ft365.org\/index.php\/2025\/08\/10\/whos-afraid-of-the-hidden-home-equity-tax-bankrate\/","title":{"rendered":"Who’s Afraid Of The Hidden Home Equity Tax? | Bankrate"},"content":{"rendered":"
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Key takeways<\/span> <\/span> <\/h2>\n
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  • More home sellers may incur a capital gains tax on their proceeds, the National Association of REALTORS warns, due to the dizzying rise in home equity stakes over the last few years \u2013 and no changes to exemption limits. <\/li>\n
  • Even with the increase, though, it\u2019s unlikely that more than 10\u201315 percent of sellers would realize a profit over $500,000, which would trigger the tax (for married couples filing jointly). <\/li>\n
  • To avoid or minimize the \u201chidden home equity tax,\u201d homeowners can file returns jointly, increase the home\u2019s cost basis to lower any taxable profit, and live in the home long enough to take full advantage of the exemption. <\/li>\n<\/ul><\/div>\n

    Over the past decade, home prices have skyrocketed and so has homeowner equity. If you\u2019re thinking about selling your house, there\u2019s a good chance you\u2019ll walk away with a nice profit. The flip side? Capital gains taxes could take a big bite out of those earnings.<\/p>\n

    According to a study by the National Association of Realtors (NAR), roughly 29 million households are teetering on the edge of a \u201ccapital gains cliff,\u201d potentially triggering a significant tax hit when they sell, with millions more projected to do so by 2030. Approximately one in three homeowners are already at risk of this \u201chidden home equity tax,\u201d as trade publication Realtor.com dubs it.<\/p>\n

    But before you start stressing over a huge bill \u2013 breathe. For most home sellers, incurring the capital gains tax remains highly unlikely. Even if you do, there are strategies to minimize it or avoid it altogether.<\/p>\n

    How capital gains taxes on home sales work<\/h2>\n

    When you sell a home<\/u> (or any asset) for more than you originally paid, the money you make from that sale, or your profit, is considered a capital gain.<\/p>\n

    If you\u2019ve owned the home for more than 12 months (which is the case for a majority of sellers), you fall under the \u201clong-term\u201d capital gains category. That\u2019s better for you, since long-term gains are taxed at a lower rate than regular income: either zero, 15, or 20 percent.<\/p>\n

    Your rate and how much you will actually owe (if anything) depends on your income. Most folks fall into the 15 percent rate, which applies if your taxable income falls in the $47,025\u2013$518,900 range for singles and $94,050\u2013$583,750 for married couples filing jointly. The 20 percent rate kicks in for incomes above these levels. If your income falls below them, you could face no capital gains tax at all.<\/p>\n

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    Lightbulb Icon<\/title> <\/svg> <\/p>\n
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    In addition to the federal government, your state may also want a piece of your profit pie. State capital gains levies range from 2.5% to over 10%. New York and New Jersey impose some of the highest rates for homeowners, with California topping the list at 13.3%.<\/p>\n<\/p><\/div>\n<\/p><\/div>\n

    The capital gains tax exclusion for homeowners<\/h3>\n

    That\u2019s how the capital gains tax works in general. But residential real estate gets treated a little differently than other assets: The IRS gives homeowners a big break. If the house you\u2019re selling was your primary residence, and you lived in it for at least two out of the last five years before selling, you\u2019re allowed a certain amount of profit before the tax kicks in. Specifically:<\/p>\n

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    • Single?<\/strong> You can exclude up to $250,000 in gains. <\/li>\n
    • Married and filing jointly?<\/strong> That exclusion goes up to $500,000.<\/li>\n<\/ul>\n

      In other words, you would need to make over $250,000\/$500,000 in profit to trigger the capital gains tax on a home sale. You\u2019d then owe tax on the amount that exceeds the exemption (not on your total profit).<\/p>\n

      It\u2019s this exclusion, established in 1997, that\u2019s causing NAR\u2019s concerns. Home values have soared in the last few years, and NAR notes a lot of homeowners\u2019 equity stakes surpass the exclusion, especially in real estate markets where prices have doubled or even tripled. It\u2019s these homeowners that could potentially face unexpected, substantial tax bills, which discourages them from selling and negatively impacts a housing market that\u2019s already short on inventory \u2013 effectively, a \u201cstay-put penalty,\u201d as Realtor.com puts it. <\/p>\n

      Debunking the capital gains tax panic<\/h2>\n

      All of these numbers may have you dizzy, but the reality is that most homeowners won\u2019t owe capital gains taxes on a sale.<\/p>\n

      First of all, not that many homes are affected. It\u2019s true that the current exclusion limits were set nearly 30 years ago, when the median U.S. home price was much lower \u2014 and have not been adjusted for inflation over time. According to U.S. Department of Housing and Urban Development data, in the first quarter of 1997, the median home cost around $145,000 , vs. $423,000 in Q1 2025. \u201cIn the late 90s, very few \u2014 less than 1 percent \u2014 of homes would have met the criteria\u201d to trigger the tax, says John Ricco, associate director of Policy Analysis at The Budget Lab at Yale, a nonpartisan policy research center. \u201cAnd now, because of recent and continual inflation over the decades, that number is higher.\u201d<\/p>\n

      Even so, \u201cin our calculation, [the home value rise] impacts probably about 10 to 15 percent of homes,\u201d Ricco says. \u201cThis is not a large fraction of the population.\u201d <\/p>\n

      Home equity stake doesn\u2019t equal selling price or profit<\/h3>\n

      Another critical thing to keep in mind: Rising home values and\/or equity stakes do not necessarily translate into taxable gains. Your home equity<\/u> is the difference between your home\u2019s worth and what you owe on your mortgage, not your sales price or your actual profit on a sale. Just because you have $550,000 worth of equity or your home has appreciated in value, it doesn\u2019t automatically mean you\u2019ll trigger the capital gains tax. And even if you did, you\u2019d owe tax only on the excess amount \u2013 not on your entire gain, and certainly not on the price you realized for your home.<\/p>\n

      And that one-third of homeowners \u2013 29 million people \u2013 who are already at risk of a capital gains tax bill? They exceed the exclusion\u2019s $250,000 limit, the NAR study specifies. But, according to NAR\u2019s own data, the majority of homebuyers (62 percent) are married couples \u2013 who enjoy a doubled exclusion up to $500,000 (assuming they file jointly). \u201cMost people are not selling homes that have gone up more than half a million dollars,\u201d says Ricco.<\/p>\n

      Bottom line: While the increase in home values has more sellers nearing the exclusion caps, it\u2019s still a relatively small group. \u201cAbout 90 percent of people would not be subject to this tax,\u201d Ricco concludes.<\/p>\n

      Who\u2019s most likely to get hit by the \u201chidden home equity tax\u201d?<\/h2>\n

      That said, there are situations where you could end up owing capital gains taxes on the sale of your home. Those most at risk usually fall into one (or more) of the following categories:<\/p>\n

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      • \n

        You\u2019re a longtime owner in a high-cost market.<\/strong> If you\u2019ve owned your home for years in expensive markets like San Francisco, New York City or Los Angeles, chances are your home\u2019s value has skyrocketed well beyond the original purchase price, sometimes enough to blow past the exclusion limits. <\/p>\n<\/li>\n

      • \n

        You\u2019re in a high-income tax bracket.<\/strong> Capital gains tax rates range from 0 to 20 percent, depending on your income. If you\u2019re in a higher bracket, not only are you more likely to exceed the exclusion threshold, but you\u2019ll also get taxed at the largest capital gains rate.<\/p>\n<\/li>\n

      • \n

        You\u2019re single or file separately.<\/strong> That $250,000 capital gains exclusion is only half of what married couples filing jointly can take. So if your home has appreciated significantly, it\u2019s easier to be hit with the cap if you\u2019re selling solo. Or if you\u2019re married filing separately, and have an income that exceeds $291,850.<\/p>\n<\/li>\n

      • You\u2019ve lived in the home for decades but haven\u2019t improved it much.<\/strong> Upgrades like a new kitchen, an added bathroom, or finishing the basement can increase your home\u2019s cost basis, which lowers your taxable profit (more on that below).<\/li>\n<\/ul>\n

        Can you avoid capital gains tax on a home sale?<\/h2>\n

        Even if you\u2019re one of the few who could face capital gains tax on your home sale, there are ways to avoid or reduce it.<\/p>\n

        File as married filing jointly<\/h3>\n

        Filing jointly doubles your exclusion to $500,000. Your home can be in both your names, but only one spouse has to meet the primary residency requirement (living in the home for at least two years out of the last five) to qualify. The two years don\u2019t have to be consecutive, either.<\/p>\n

        Calculate your gains carefully<\/h3>\n

        Your profit on your home isn\u2019t just based on the difference between your selling price and your own purchase price. You get to add in any significant sums you invested in maintaining, repairing and improving the property over the years. Chances are, you\u2019ve shelled out a lot of cash on upkeep: Bankrate\u2019s Hidden Costs of Homeownership study shows that annual home maintenance averages more than $8,800 a year, the most significant single cost for homeowners. So, keep a record and documents related to any significant upgrades, like a new roof, kitchen remodel, or modernized HVAC system. These costs can be added to your home\u2019s cost basis, lowering your taxable gain.<\/p>\n

        Time your sale wisely<\/h3>\n

        If your home\u2019s value has shot up, and you\u2019re nearing the exclusion limit, consider holding off until you\u2019ve lived there long enough (two out of the last five years) to qualify for the full exclusion. Or, if you\u2019re engaged, selling after you marry could double your exclusion.<\/p>\n

        Should capital gains tax rules change?<\/h2>\n

        \u201cThe current federal policy on capital gains taxes is steadily and quietly distorting the housing market, locking in older homeowners, and strangling inventory just when America needs it most,\u201d NAR\u2019s report states. Admittedly, the capital gains limits haven\u2019t been changed in close to three decades. In response to the growing number of homeowners nearing the limits, several members of Congress, including Rep. Marjorie Taylor Greene (R-Ga.) and Rep. Jimmy Panetta (D-CA), have proposed eliminating capital gains taxes or at least raising the home-sale exclusion amounts. President Trump has also weighed in, saying he\u2019s considering eliminating the capital gains tax.<\/p>\n

        However, some financial experts are skeptical about how far-reaching the benefits of eliminating a capital gains tax would be. \u201cOn average, the people who would benefit are wealthier, they are higher income, and they are older than the average person in the U.S. or the average household in the U.S.,\u201d says Ricco. \u201cWe calculate that among homeowners, only about one in 10 would benefit from this.\u201d<\/p>\n

        \u201cAlthough it would help people in certain high-value areas, it wouldn\u2019t have the intended impact of really bringing home prices down across the nation,\u201d agrees Clint Kraft, founder and financial advisor at Kraft Capital Management in Ann Arbor, Michigan. \u201cFor a lot of these first-time home buyers\u2014those are not the properties they would be looking to purchase anyway.\u201d<\/p>\n

        Eliminating capital gains taxes could also have an unintended negative impact, like the major loss of revenue at both the federal and state levels, says Miklos Ringbauer, principal of MiklosCPA, a California-based accounting and tax strategy firm. \u201cIf the federal government increases it or removes it fully, some states may not adopt the same rules and [it could] impact the budget deficit or the funding available for different resources,\u201d such as public schools, he says. \u201cAny tax legislation that happens will always benefit some, and it will always disadvantage some others in the process.\u201d<\/p>\n

        \n

        <\/p>\n

        \n

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        Keep your financial options open and put your equity to use with a flexible HELOC.<\/p>\n

        Explore HELOC offers <\/p>\n<\/div><\/div>\n

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        Help us improve our content<\/p>\n<\/p><\/div>\n<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"

        Key takeways More home sellers may incur a capital gains tax on their proceeds, the National Association of REALTORS warns, due to the dizzying rise in home equity stakes over the last few years \u2013 and no changes to exemption limits. Even with the increase, though, it\u2019s unlikely that more than 10\u201315 percent of sellers<\/p>\n","protected":false},"author":2,"featured_media":2216,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":["post-2215","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-latest-news"],"featured_image_urls":{"full":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756.jpg",1078,720,false],"thumbnail":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756-150x150.jpg",150,150,true],"medium":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756-300x200.jpg",300,200,true],"medium_large":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756-768x513.jpg",640,428,true],"large":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756-1024x684.jpg",640,428,true],"1536x1536":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756.jpg",1078,720,false],"2048x2048":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756.jpg",1078,720,false],"morenews-featured":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756-1024x684.jpg",1024,684,true],"morenews-large":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756-825x575.jpg",825,575,true],"morenews-medium":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756-590x410.jpg",590,410,true],"crawlomatic_preview_image":["https:\/\/ft365.org\/wp-content\/uploads\/2025\/08\/2215-GettyImages-826220756-219x146.jpg",219,146,true]},"author_info":{"display_name":"henry","author_link":"https:\/\/ft365.org\/index.php\/author\/henry\/"},"category_info":"Latest News<\/a>","tag_info":"Latest News","comment_count":"0","_links":{"self":[{"href":"https:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/posts\/2215","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/comments?post=2215"}],"version-history":[{"count":0,"href":"https:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/posts\/2215\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/media\/2216"}],"wp:attachment":[{"href":"https:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/media?parent=2215"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/categories?post=2215"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ft365.org\/index.php\/wp-json\/wp\/v2\/tags?post=2215"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}