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Massachusetts homeowners have seen dramatic increases in property values—but those gains now come with an unexpected catch. More than 60% of all homeowners in the state could be on the hook for a hidden home equity tax when they sell, thanks to outdated federal capital gains rules that haven’t changed in nearly three decades.
According to the National Association of REALTORS®, 62.3% of Massachusetts homeowners exceed the $250,000 exclusion allowed for single filers. Another 23.5% go beyond the $500,000 threshold for married couples filing jointly.
These staggering figures reflect the sharp appreciation seen in Boston, Cambridge, and across the Commonwealth.
A stagnant cap and soaring values
When the capital gains tax exclusion was established in 1997, $250,000 for single filers and $500,000 for couples covered the vast majority of home sales. But those caps were never indexed to inflation. Meanwhile, home values have soared more than 260% nationally—and even more in high-demand states like Massachusetts.
If the limits had been adjusted, today’s thresholds would exceed $660,000 and $1.32 million. But without an update, homeowners in modest neighborhoods are finding themselves subject to capital gains taxes on home sales—even if their equity was built by staying put.
Massachusetts taxes capital gains as income. Long-term capital gains are usually taxed at a flat rate of about 9% but there are some types of capital gains that the state taxes at 12%.
Even modest homes are affected
With a median home price near $600,000, many Massachusetts sellers are discovering that average homes now trigger taxable gains. NAR data shows that those exceeding the $250,000 cap will face taxes on an average of $243,585. For those over the $500,000 limit, the average taxable gain is $249,276.
Those numbers mean real money—especially for retirees planning to downsize or parents passing down a family home. The result is what experts call the “stay-put penalty”: people avoid selling just to avoid the tax, reducing inventory and worsening affordability statewide.
A bleak outlook for 2035
If current trends continue, Massachusetts homeowners will see even greater exposure in the years ahead. By 2035, NAR projects that 91.4% of owners will exceed the $250,000 limit. More than half—67.9%—will go beyond the $500,000 threshold.
That puts Massachusetts among the most at-risk states in the country. It’s also a major reason why the housing market is cooling nationwide—not due to lack of demand, but because long-term owners can’t afford to sell.
Momentum builds for a policy update
To solve the issue, lawmakers are pushing the More Homes on the Market Act, which would double the exclusion limits 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 Congress acts, Massachusetts homeowners should be proactive. Reviewing how capital gains taxes apply to a home sale and planning ahead with a financial advisor can help reduce surprises—and preserve more of the wealth that’s been built over time.
This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.