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Homeowners across New Jersey are discovering an unpleasant truth: their equity may come with an unpleasant tax bill.
A new analysis from the National Association of Realtors® reveals that 46.2% of homeowners in the state now have more home equity than the IRS allows to be excluded from capital gains taxes. Another 12.7% exceed even the $500,000 threshold for joint filers, putting them squarely in the tax danger zone.
This issue stems from a decades-old policy. The capital gains exclusion—$250,000 for individual filers, $500,000 for married couples—was set in 1997 and hasn’t changed since. Over that same period, home prices have risen more than 260% nationwide, leaving millions vulnerable to unexpected tax liability.
New Jersey adds another layer of pressure. The state taxes capital gains as ordinary income, with rates that can climb to 10.75%—one of the highest in the country. For longtime owners selling in today’s market, the combined federal and state taxes can take a substantial bite out of their proceeds.
The “stay-put” penalty hits the Northeast
Many sellers are learning the hard way that home equity can trigger unexpected tax exposure. For people who’ve owned their homes for decades, appreciation has turned into a liability. Gains that once felt like financial security are now a potential tax burden.
That’s led to a market trend economists call the “stay-put penalty.” Sellers who would downsize or relocate are holding off to avoid taxes. And homes that could otherwise help balance supply and demand remain off the market.
New Jersey’s exposure is particularly acute in high-demand areas like the suburbs of New York City and Philadelphia. Towns like Montclair, Maplewood, and Westfield have seen years of steady appreciation. Even modest homes in these communities may now exceed the federal exemption limits.
(Realtor.com)
How New Jersey Compares to Other States
With 46.2% of homeowners over the $250,000 limit, New Jersey’s tax exposure is above average—but not as extreme as places like California or Colorado. Still, its 12.7% rate of owners over the $500,000 threshold places it among the higher-taxed states in the Northeast.
And when combined with state tax policy, the effect is magnified. Unlike nearby New Hampshire, which doesn’t tax capital gains, New Jersey’s top tax rate is among the most punishing in the country. That makes the Garden State one of the toughest places to sell without tax consequences.
Homeowners may not even realize they’ve crossed the line. But when they go to sell, they’re surprised to learn the IRS—and Trenton—want a piece. Capital gains taxes on real estate can easily reach into the tens of thousands of dollars.
2035: A Ticking Tax Clock
If no changes are made, the problem is set to get worse. By 2035, nearly 70% of homeowners nationwide could exceed the $250K threshold, according to NAR projections. In New Jersey, where prices remain high and inventory tight, even more owners will be pulled into taxable territory.
The NAR projects that 86% of homes will exceed the $250,000 limit while 53.3% will go past the $500,000 limit in the next decade.
That’s why housing experts are rallying behind the More Homes on the Market Act. The proposal would double the exemption and tie it to inflation, easing pressure on longtime owners and unlocking more inventory.
Until that happens, New Jersey sellers need to plan ahead. Know your equity, understand your tax risk, and talk to a professional before listing. Because that sale could come with a surprise—one that eats away at what you’ve spent years building.
This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.