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A quarter of South Dakota homeowners may be in for a rude awakening when they go to sell. According to data from the National Association of Realtors®, 25.4% of homeowners in the state have built up more home equity than the IRS allows to be excluded from capital gains tax. Another 4.4% have passed the $500,000 threshold for married couples—potentially triggering one of the largest tax bills in real estate.
The federal exemption—$250,000 for single filers and $500,000 for joint—is frozen at 1997 levels. Since then, home prices have increased by more than 260% across the country. That appreciation has quietly turned many average homeowners into tax targets.
South Dakota is one of the few states that doesn’t tax capital gains. But that doesn’t mean sellers are off the hook. Federal taxes alone can cost homeowners tens of thousands of dollars once they cross the IRS threshold.
Appreciation That Comes With a Price
Real estate appreciation has been steady across South Dakota, especially in cities like Sioux Falls, Rapid City, and Brookings. Homes purchased for well under $200,000 decades ago are now selling for significantly more. That’s great for wealth—but it comes with a tax catch.
This growing problem is often referred to as the home equity tax. It’s triggered when a seller’s profit exceeds outdated IRS caps—and its impact is spreading quickly beyond high-cost states.
Many homeowners, especially retirees, are now facing a “stay-put penalty.” They delay moving to avoid tax exposure. That, in turn, keeps larger homes off the market and squeezes supply for younger families.
(Realtor.com)
How South Dakota Compares in the Midwest
South Dakota’s 25.4% exposure at the $250K threshold is modest compared to national hot spots like California or Colorado. But it’s higher than many of its Midwest neighbors. For example, Iowa stands at just 9.8%, while North Dakota is at 16.7%.
The 4.4% figure for South Dakotans over the $500K cap is where the state really stands out. That’s double above Nebraska (2.3%) and Minnesota (3.7%), and even ahead of higher-cost states like Pennsylvania (3.4%).
Once limited to the nation’s priciest ZIP codes, the capital gains tax on real estate is now reaching into smaller cities and rural communities. In South Dakota, appreciation is doing what income never did: pushing average homeowners past federal tax limits.
The view toward 2035
By 2035, nearly 70% of U.S. homeowners could exceed the $250,000 exemption, with over 38% crossing the $500,000 mark. That would place millions more at risk of tax exposure, including many in lower-cost states like South Dakota.
The projected average federal tax liability for those over the cap could hit $74,708. For homeowners relying on that equity to fund retirement or help their kids, the hit is anything but theoretical.
That’s why housing advocates are backing the More Homes on the Market Act. The proposal would double the exclusions and tie them to inflation. It’s a change supporters believe would help unlock home equity and ease inventory pressure nationwide.
Until then, even in a no–income tax state like South Dakota, long-term homeowners should understand the risks. Because appreciation may come with a federal bill attached.
This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.