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North Dakota homeowners who’ve stayed in their properties for years may be in for a financial surprise once they decide to sell.
A new analysis from the National Association of Realtors® shows that 16.7% of owners in the state now have more home equity than the IRS currently allows to be excluded from capital gains taxes, which is $250,000 for an individual owner. An additional 2.2% have built gains above the $500,000 threshold for married couples filing jointly.
The issue comes down to an outdated rule. Since 1997, the federal government has allowed sellers to exclude $250,000 in capital gains if single, or $500,000 if married. But home prices have increased over 260% nationwide in that time, making those limits feel increasingly out of touch.
In North Dakota, where home prices have risen steadily—especially in places like Fargo, Bismarck, and Grand Forks—those long-term gains are starting to show up on tax forms. The state taxes capital gains as income, with a top rate of 2.5%. However, homeowners can deduct 40% of their gains, which softens the impact. Still, once federal taxes are factored in, that deduction only goes so far.
Equity That Comes With a Catch
For homeowners who bought early, paid down their mortgage, and stayed put, that equity used to represent financial freedom. But now, selling can mean handing over a chunk of those gains to the IRS. That’s what experts are calling the home equity tax.
This situation is fueling what’s known as the “stay-put penalty.” Many aging or downsizing owners are holding off on listing because of the potential tax hit. And that decision is contributing to inventory shortages across the region.
It’s especially problematic in family neighborhoods. Homes that would normally hit the market aren’t moving, limiting options for buyers and driving up competition. That means higher prices, fewer listings, and more people shut out.
(Realtor.com)
How North Dakota compares to its neighbors
North Dakota’s 16.7% exposure places it slightly below of Nebraska (16.9%) and well below South Dakota (25.4%). While not as extreme as markets in the West or on the coasts, the trend is clear: even moderately priced states are seeing the squeeze.
Homeowners in the Midwest often assume they’re insulated from this issue. But long-term appreciation and inflation don’t discriminate by ZIP code. And when it comes to capital gains tax on real estate, the IRS sees equity the same way—whether you’re in California or North Dakota.
That makes financial planning critical. Many sellers only learn about their exposure when they’re preparing to move or retire. At that point, the tax bill can dramatically change the plan.
2035 forecast: tax pressure will rise
Looking ahead, the numbers are expected to jump. By 2035, nearly 70% of homeowners nationwide could exceed the $250,000 cap, with many also topping the $500,000 limit. In North Dakota, that would mean tens of thousands of new homeowners facing taxable gains. In fact, according to NAR’s forecast, by 2035, the percentage of North Dakota homeowners exceeding the $250,000 exclusion will rise to 57.20%, while 15.30% will surpass the $500,000 mark.
That’s why housing advocates are backing the More Homes on the Market Act. The proposed bill would double the exclusion and tie it to inflation going forward. That move could unlock more homes and ease market pressure.
Until then, homeowners should take stock of their financial position. That includes reviewing HELOC and home equity borrowing options, understanding current exemptions, and consulting a tax professional. Because what looks like a simple sale can come with unexpected costs.
For homeowners in North Dakota, the message is clear: equity is a powerful asset, but unlocking it could trigger a big tax bill. And in a market this competitive, that’s not something you want to learn too late.
This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.