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Nearly half of Rhode Island homeowners could face a surprise tax bill when they go to sell. According to new research from the National Association of Realtors®, 47.2% of homeowners in the state have accumulated more home equity than the federal capital gains tax exclusion allows. An additional 89.2% of Rhode Islanders have exceeded the $500,000 threshold reserved for married couples, putting them at risk of one of the most burdensome taxes tied to real estate.
The federal exemption—set at $250,000 for individuals and $500,000 for joint filers—hasn’t changed since 1997. Meanwhile, home prices have surged more than 260% nationally. What once served as a generous buffer has now shrunk to the point of irrelevance in many markets.
In Rhode Island, capital gains are taxed as income, with rates topping out at 5.99%. Combined with federal obligations, the cost of selling could reach tens of thousands of dollars—cutting directly into a homeowner’s return.
Appreciation that comes with a price
For decades, Rhode Island residents have considered their homes their most valuable financial asset. But as values rise, so does exposure to what’s now known as the home equity tax. This tax kicks in when a seller’s profit exceeds outdated IRS caps—and the consequences can be substantial.
Across the state, homes bought in the 1990s or early 2000s for under $200,000 have appreciated well beyond their original price. In coastal areas and Providence suburbs, values have more than doubled. While that’s great for long-term equity, it creates new financial risks when it comes time to sell.
The result is what economists call the “stay-put penalty.” Rather than downsizing or relocating, many older homeowners are choosing to remain in place—delaying sales to avoid triggering a capital gains tax bill. That decision keeps larger homes off the market and further constrains an already limited housing supply.
(Realtor.com)
How Rhode Island compares in the Northeast
Rhode Island’s 47.2% exposure rate places it mid-pack among its Northeastern neighbors. In Massachusetts, a staggering 62.3% of homeowners are over the $250K exclusion, and 23.5% exceed the $500K threshold. New Hampshire and New Jersey are also in the same ballpark though, at 46.2% and 50%, respectively.
Even Vermont, with its slower pace of price growth, has 35.6% of homeowners above the individual cap. By contrast, Connecticut falls slightly below Rhode Island, with 23.9% exposed.
Once a tax that mostly impacted the wealthy, capital gains on real estate are increasingly reaching middle-income homeowners. In Rhode Island’s tight and appreciating market, the line between average seller and tax-liable seller is fading.
The view toward 2035
Projections suggest the problem is only going to grow. By 2035, NAR estimates nearly 70% of all U.S. homeowners could exceed the $250,000 cap, and over 38% could go beyond $500,000. In a state like Rhode Island, where real estate appreciation continues to rise, that means more families will face tax exposure just for trying to access the equity in their homes.
The average federal tax liability for homeowners over the exemption is projected to reach $74,708 by 2035. States with historically moderate home prices—like Rhode Island—could soon join the ranks of high-tax states as appreciation builds year after year.
To counter this trend, the More Homes on the Market Act has been introduced in Congress. It would double the exemption thresholds and link them to inflation. Supporters say this would help free up inventory and remove a major barrier for older owners contemplating a move.
Until any changes are enacted, Rhode Island homeowners—especially those with decades of appreciation—should understand how their home equity affects their taxes. What looks like a strong return at sale could come with a hidden cost.
This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.