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More than a third of Tennessee homeowners could be facing a costly tax surprise when they sell. According to new data from the National Association of Realtors®, 36.1% of homeowners in the state have built up home equity that exceeds the federal capital gains exclusion. Another 8.3% go over the $500,000 threshold for married couples, placing them squarely in the crosshairs of a little-known but growing real estate tax burden.
The capital gains exclusion—$250,000 for individuals and $500,000 for couples—hasn’t changed since 1997. Over that time, home prices have risen more than 260% nationwide, turning what was once a generous buffer into a narrow target. As home values climb, more average sellers are finding themselves unexpectedly exposed.
Tennessee doesn’t tax capital gains at the state level. But that doesn’t shield sellers from federal taxes, which can take a significant bite out of profits. For longtime homeowners, the bill can easily run into five figures.
Appreciation that comes with a price
In cities like Nashville, Knoxville, and Chattanooga, home prices have surged over the past two decades. Houses purchased for under $200,000 in the early 2000s now sell for two to three times that amount. That growth builds wealth—but also triggers tax exposure.
This is the essence of the home equity tax, a tax on appreciation that exceeds outdated federal thresholds. It’s an issue that once affected only the wealthy—but now, it’s hitting middle-income homeowners across Tennessee.
As a result, some homeowners are staying put rather than facing a capital gains hit. Economists call this the “stay-put penalty.” It keeps homes off the market and worsens the state’s inventory crunch.
(Realtor.com)
How Tennessee compares in the South
At 36.1%, Tennessee’s rate of exposure to the $250K capital gains threshold is higher than neighboring states like South Carolina (28.5%) and Kentucky (14.1%). It trails more expensive markets like Florida (47.8%), but is still significant for a state long considered affordable.
When it comes to the $500K cap, Tennessee’s 8.3% of homeowners above the limit puts it ahead of Mississippi (2.0%) and Alabama (4.6%). Even in a state with no income tax, home appreciation is bringing tax challenges to the forefront.
Historically, capital gains tax on real estate only affected the top end of the market. Now it’s an issue for families in midrange homes, especially in fast-growing metro areas.
The view toward 2035
If current trends continue, nearly 70% of U.S. homeowners could exceed the $250,000 exclusion by 2035. In Tennessee, where prices are still climbing, many more households could end up owing taxes just for selling their primary home.
The average tax liability for sellers over the cap could hit $74,708. That’s a major burden for families who planned to use their equity for retirement, relocation, or care.
That’s why there’s momentum behind the More Homes on the Market Act, a proposal that would double the exemption and index it to inflation. Supporters believe it would free up inventory and offer relief to homeowners feeling locked in by the tax code.
Until reforms are passed, Tennessee sellers need to understand how appreciation and tax policy intersect. Because what looks like a profitable sale could come with an unexpected federal price tag.
This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.