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In New York, nearly half of homeowners could be in for a costly surprise when they decide to sell. According to a new report from the National Association of Realtors®, 46.1% of homeowners in the state have more home equity than the IRS allows to be excluded from capital gains taxes. Another 18.7% have gains exceeding the $500,000 cap used for married couples filing jointly.
At the heart of the issue is a capital gains tax exclusion that hasn’t changed since 1997. Sellers can still exempt $250,000 in profit if they’re single, or $500,000 if married and filing jointly. But home prices across the country have jumped more than 260% since then. For longtime homeowners in high-appreciation markets like New York, that outdated cap no longer offers enough protection.
New York treats capital gains as income, and with a top marginal tax rate of 10.9%, it’s one of the most heavily taxed states in the country. That means the tax bite can be severe—especially when combined with federal obligations.
Equity that comes with a catch
For homeowners who bought early and stayed put, the value in their property is supposed to be a reward. But today, that reward often comes with a tax bill. This phenomenon—dubbed the home equity tax—hits hardest when people go to sell a home they’ve owned for decades.
It’s especially punishing for retirees looking to downsize, or families selling long-held properties. In cities like New York, Buffalo, and even upstate markets like Saratoga Springs, steady price appreciation over time adds up. And many sellers don’t realize they’ve crossed the IRS’s threshold until they’re already under contract.
This tax exposure is fueling a market behavior known as the “stay-put penalty.” People who would otherwise sell are holding off. That keeps inventory tight—and competition high—for those trying to buy.
(Realtor.com)
How New York Compares to the Region
New York’s 46.1% exposure to the $250,000 cap places it in the upper tier nationally. The 18.7% of homeowners who exceed the $500,000 limit is one of the highest rates in the Northeast. That reflects the long-standing value growth seen in both urban and suburban areas across the state.
Unlike New Hampshire, which has no capital gains tax, or Pennsylvania, where tax rates are lower, New York’s combined state and federal liability makes the impact more severe. Even owners who aren’t selling luxury properties may face a tax bill that catches them off guard.
And these aren’t just investor-owned properties. The capital gains tax on real estate applies to primary residences once the exemption is used up. That includes brownstones in Brooklyn, ranch homes in the Hudson Valley, and condos in Rochester alike.
By 2035, the Pressure Builds
Projections suggest the issue is only going to get worse. By 2035, nearly 70% of U.S. homeowners could exceed the $250K cap. In New York, where prices remain elevated, many more will breach the federal exemption limits.
NAR projects that in the next decade, 75% of New York homeowners will exceed the $250,000 limit, while close to 50% will cross the $500,000 threshold, if the market stays as it is now.
To address the growing tax burden, the More Homes on the Market Act proposes doubling the existing exclusions and tying them to inflation. Housing experts say it could ease pressure on longtime homeowners—and free up inventory in tight markets.
Until then, New Yorkers should take a hard look at their finances. Review your home equity, know your potential tax exposure, and talk to a professional before listing. Because what feels like a gain on paper could come with a real tax hit.
This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.