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Kentucky homeowners who’ve stayed put and built equity over decades may be in for a surprise if they decide to sell.
A federal capital gains tax rule that hasn’t been updated since 1997 is quietly costing thousands in the Bluegrass State—and as home values continue to rise, the number affected is only growing.
According to the National Association of REALTORS®, 14.1% of Kentucky homeowners exceed the $250,000 capital gains exclusion for individual filers. Another 1.9% have surpassed the $500,000 limit for joint filers. With appreciation gaining ground in cities like Louisville, Lexington, and Bowling Green, sellers are increasingly facing taxes on profits they assumed were protected.
A federal rule that’s stuck in the past
The current capital gains exclusion allows homeowners to avoid tax on $250,000 of profit—or $500,000 for couples—when selling their primary residence. That policy was designed in 1997, but it’s never been indexed to inflation.
In the years since, U.S. home prices have jumped more than 260%. If the caps had kept up, they’d now sit at $660,000 for individuals and $1.32 million for couples. But because they haven’t, Kentucky homeowners with modest, long-held homes are finding themselves subject to capital gains tax on real estate.
Kentucky adds to the burden by taxing capital gains as ordinary income at rates up to 4.5%. Combined with federal obligations, the bill can reach into the tens of thousands—especially for retirees hoping to use their equity to downsize or relocate.
Equity growth with a hidden price tag
While Kentucky isn’t known for runaway home prices, the state has seen steady growth over the past two decades. According to NAR estimates, sellers who exceed the $250,000 cap face taxes on an average of $82,052 in additional gain. For those over the $500,000 limit, the average taxable gain jumps to $128,112.
These aren’t just sellers of luxury properties. Many are families who’ve held onto their homes through market cycles, or retirees looking to cash in after decades of ownership.
But when faced with an unexpected tax bill, many choose to stay put instead—what economists call the “stay-put penalty.” That trend is reducing the number of listings in an already tight market.
A look ahead: 2035 projections
By 2035, 44.9% of Kentucky homeowners are expected to exceed the $250,000 exemption, and 9.8% will be over the $500,000 mark. That means the majority of longtime sellers could soon be impacted, even in areas that were once considered relatively affordable.
It’s a growing issue contributing to the national housing gridlock, where sellers hold off on listing, and buyers face limited options and rising prices.
A legislative fix in motion
To ease the burden, housing advocates support the More Homes on the Market Act, a bipartisan bill 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”.
Until changes come, Kentucky sellers should review how capital gains tax works on a home sale and consult a tax expert before listing. With the right planning, more homeowners can protect the equity they’ve earned—and use it to move forward.
This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.