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In Maryland, rising property values have boosted the financial outlook for many homeowners. But for nearly a third of them, that appreciation may come at a cost. A federal tax rule from 1997 is forcing thousands across the state to pay taxes on equity gains they thought were protected.
According to the National Association of REALTORS®, 31.8% of Maryland homeowners now exceed the $250,000 capital gains exclusion for individual filers. Another 6.9% are over the $500,000 limit for married couples filing jointly.
With home prices climbing in cities like Baltimore, Silver Spring, and Bethesda, more sellers are facing unexpected tax bills.
Old tax limits in a new market
The capital gains tax exclusion was established to shield homeowners from taxes on the profit from selling their primary residence. The thresholds—$250,000 for individuals and $500,000 for couples—have not changed since 1997, despite home prices soaring more than 260% nationwide.
In Maryland, where demand for housing near Washington, D.C., continues to rise, those stagnant thresholds have become increasingly problematic. Many homeowners are learning that capital gains taxes on home sales apply even to modest family homes if they’ve appreciated over time.
Maryland taxes capital gains as ordinary income at rates up to 5.75%. Combined with federal capital gains tax, sellers could lose a substantial portion of their home equity to taxes—especially if they’ve owned their property for decades.
A middle-class problem
This isn’t a tax targeting high-income earners or luxury properties. Many of the 512,460 Maryland homeowners who exceed the $250,000 exclusion live in typical suburban homes. According to NAR data, the average taxable gain for those homeowners is $132,299. For those over the $500,000 limit, the average gain balloons to $157,486.
For some, that means five- or six-figure tax liabilities they didn’t anticipate. As a result, more homeowners are choosing not to sell at all—a behavior economists refer to as the “stay-put penalty.” That trend limits housing supply and contributes to rising prices across the state.
Maryland’s risk is poised to climb
Projections show that by 2035, 78.6% of Maryland homeowners will exceed the $250,000 exemption, and 36.7% will surpass the $500,000 cap. That means two-thirds of home sellers could face tax exposure unless the law changes.
It’s one of the key factors contributing to a nationwide slowdown in the housing market. Fewer homes are hitting the market, and affordability challenges are compounding for new buyers.
A bill that could help unlock housing
To address the problem, housing advocates support the More Homes on the Market Act. The legislation would double the capital gains exclusions and adjust them for inflation—bringing tax policy in line with today’s housing realities.
“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 then, Maryland homeowners—especially those who’ve held their properties for 15 years or more—should carefully assess how capital gains tax applies to real estate and consult a financial professional before listing. A little planning now can preserve more of your hard-earned equity for the future.
This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.