Getty Images
In the nation’s capital, more than half of all homeowners are now at risk of paying a hidden tax on the very equity they’ve spent decades building. A federal capital gains exclusion that hasn’t been updated since 1997 is placing a surprising financial burden on longtime D.C. residents who choose to sell.
According to the National Association of REALTORS®, 51.6% of Washington, D.C., homeowners have equity gains that exceed the $250,000 exemption available to single filers. A
nother 25.4% are over the $500,000 exclusion for married couples. These high exposure rates reflect how much the city’s real estate market has appreciated—and how far out of step the tax code has become.
Why the current tax rule no longer works
The capital gains tax exclusion lets homeowners avoid taxes on up to $250,000 of profit from the sale of a primary residence—or $500,000 for couples. But those caps have remained static since they were enacted in 1997, despite a more than 260% increase in national home values.
In a city like Washington, D.C., where home prices have soared over the past two decades, it’s no surprise that so many sellers now find themselves above those limits. And with no adjustment for inflation, the result is an increasing number of sales triggering capital gains tax on real estate.
Adding to the impact, D.C. levies its own capital gains tax at rates that can reach 10.75%, among the highest in the nation. Combined with federal obligations, that means some sellers face tax bills well into six figures—often on modest, single-family homes in neighborhoods like Capitol Hill, Petworth, or Tenleytown.
(Realtor.com)
D.C.’s unique market dynamics
What makes the situation even more urgent is the high rate of long-term ownership in D.C. Many homeowners who bought in the 1990s or early 2000s have watched their home values double or even triple. But now, instead of enjoying that equity tax-free, they’re discovering a significant portion may be subject to IRS collection.
And it’s not just luxury homeowners who are affected. With 51.6% of all homeowners over the $250,000 cap, even rowhouses, condos, and attached homes are pushing into taxable territory. For the 25.4% of married couples exceeding the $500,000 cap, the financial impact can be even more dramatic.
This growing tax burden has led many owners to rethink selling. Housing economists describe it as a “stay-put penalty”—when homeowners delay downsizing or relocating to avoid the capital gains hit.
Looking ahead to 2035
The problem is far from temporary. By 2035, projections suggest that nearly 96.1% of D.C. homeowners will exceed the $250,000 threshold, and 81% will exceed $500,000. Those staggering numbers will reshape how people in the city age in place, pass down property, or relocate later in life.
And with fewer longtime homeowners listing their properties, it’s one more factor contributing to the freezing of the housing market. The effects are already being felt by buyers facing limited inventory and sky-high prices.
Pushing for a policy update
To address this looming crisis, lawmakers are backing the More Homes on the Market Act, a bipartisan bill that would double the current capital gains exemptions and index them to inflation.
“Equity shouldn’t be a trap,” says Shannon McGahn, chief advocacy officer for the National Association of REALTORS®. “It should be a stepping stone for the next chapter”.
For D.C. homeowners, especially those nearing retirement or planning a major move, understanding how capital gains tax applies to their home sale could make all the difference. In a city built on legacy and investment, protecting that equity requires planning—and policy that reflects today’s realities.
This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.