12.5% of Homeowners in Illinois Will Face a Hidden Home Equity Tax If They Sell

In Illinois, homeowners who’ve spent decades paying off their mortgage are learning that selling could come with an unexpected financial hit.

More than 1 in 8 homeowners now face what experts are calling a hidden home equity tax—a growing consequence of federal tax policy that hasn’t been updated in over 25 years.

According to the National Association of REALTORS®, 12.5% of Illinois homeowners have surpassed the $250,000 capital gains exclusion for individual filers. Another 2.4% have crossed the $500,000 threshold for couples filing jointly. As home values rise in cities like Chicago, Naperville, and Champaign, these numbers are set to increase.

A stagnant tax cap and rising home prices

In 1997, the federal government created the capital gains exclusion to shield typical homeowners from taxes on the sale of their primary residence. Sellers could exclude up to $250,000 in profit—or $500,000 for joint filers. But those limits were never adjusted for inflation.

Since then, home values have surged more than 260% nationally. Had the exemptions kept pace, they’d now exceed $660,000 for individuals and $1.32 million for couples. Instead, longtime Illinois homeowners are learning that capital gains taxes on home sales may apply even to modest, middle-income homes.

Illinois further taxes capital gains as regular income, at rates up to 4.95%. That means a federal tax bill could be compounded by a state one, especially for owners with long-term appreciation.

A slow but growing burden

While Illinois’ current exposure rates are lower than states like California or Colorado, the number of impacted sellers is still significant. More than 424,000 Illinois homeowners are already over the $250,000 exclusion limit, and 82,500 are beyond the $500,000 cap.

These aren’t just wealthy households. Many are longtime owners who’ve seen values rise steadily in neighborhoods that were once considered affordable. For those nearing retirement or planning to relocate, the tax bill could upend those plans.

Economists warn that this leads to the “stay-put penalty”—a scenario where homeowners don’t list their properties because they fear the tax hit. The result? Less housing turnover and fewer available homes for new buyers.

Projections point to higher risk by 2035

Looking ahead, projections show a sharp increase in tax exposure. By 2035, 32% of Illinois homeowners will exceed the $250,000 exemption, and 7% will surpass $500,000.

This shift is expected to intensify pressure on the housing market, especially in urban and suburban areas where demand is high and appreciation has been steady. It’s a key reason the market is showing signs of slowing down across the country.

Fixing the freeze with tax reform

To help address the issue, real estate advocates are calling for the More Homes on the Market Act—a bipartisan proposal that would double the capital gains exclusions and index them to inflation.

“Equity shouldn’t be a trap,” says Shannon McGahn, chief advocacy officer at the National Association of REALTORS®. “It should be a stepping stone for the next chapter”.

In the meantime, Illinois homeowners planning to sell should consult a tax advisor and explore capital gains strategies to reduce their liability. In today’s market, knowing the rules can make all the difference in keeping the wealth you’ve worked hard to build.

This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.