35% of Homeowners in Virginia Will Face a Hidden Home Equity Tax If They Sell

Home values have soared across Virginia, offering substantial financial gains for many residents. But for more than one-third of homeowners, those profits come with a steep, often overlooked cost.

According to the National Association of REALTORS®, 35% of homeowners in Virginia now exceed the federal capital gains tax exemption, potentially triggering thousands in federal and state taxes when they sell.

It’s what economists call the “hidden home equity tax”—a consequence of outdated tax policy that hasn’t kept pace with the housing market’s rise.

A federal exemption frozen since 1997

Today’s capital gains exclusion allows homeowners to avoid tax on up to $250,000 in profit from the sale of a primary home—or $500,000 for married couples filing jointly. But those caps were established in 1997 and haven’t been adjusted since, despite a more than 260% increase in home prices over the same period.

In Virginia, the average gain above the $250,000 cap is $146,326. For the 9.4% of homeowners who exceed the $500,000 exemption, the average gain is even higher at $166,102. These sellers face a potential federal tax bill of $31,243—and that’s before factoring in Virginia’s own top-end 5.75% capital gains tax rate.

That dual layer of taxation turns home equity into a liability for many long-time owners, particularly in higher-priced areas like Northern Virginia, Richmond, and Charlottesville.

A Leading State for Capital Gains Exposure

Virginia ranks among the top East Coast states in capital gains exposure, trailing only markets like Massachusetts (62.3% over the $250K cap) and New Jersey (46.2%). While some states escape this burden—like Florida or Texas, which lack a state capital gains tax—Virginia’s tax structure amplifies the sting for sellers.

This tax burden hits longtime owners hardest. Many who bought decades ago are now sitting on appreciation they never expected to be taxed. As a result, some homeowners hesitate to sell, effectively locking up housing supply that’s badly needed by younger buyers and growing families.

By 2035, The Hidden Tax Will Hit Most Homeowners

This “stay-put penalty” isn’t just a current dilemma—it’s a growing one. By 2035, the National Association of REALTORS® projects that nearly 81% of homeowners nationally will exceed the $250,000 exemption, and more than 41% will surpass the $500,000 threshold.

In Virginia, this means thousands more homeowners could face significant tax liabilities—just for doing what generations have been encouraged to do: invest in homeownership and build equity over time.

The consequences ripple through the market. When longtime owners delay downsizing or moving closer to family to avoid taxes, fewer homes come up for sale. That reduces inventory, which in turn drives up prices further and makes entry even harder for first-time buyers.

A legislative fix on the table

To address the problem, housing advocates support the More Homes on the Market Act—a bipartisan proposal to double the capital gains exclusion to $500,000 for individuals and $1 million for married couples, while also indexing it to inflation.

Meanwhile, Representative Marjorie Taylor Greene from Georgia, introduced a bill on July 10 that, if passed, would eliminate federal taxes on home sales entirely.

“No more taxing the American dream,” she wrote on X “Families who work hard, build equity, and sell their homes shouldn’t be punished with a massive tax bill.”

Known as the No Tax on Home Sales Act, the bill would eliminate the federal capital gains tax on the sale of primary residences—a measure that the Republican congresswoman said would help homeowners, including those in Virginia, struggling with affordability issues and encourage mobility in the U.S. housing market.

The NAR Chief Advocacy Officer Shannon McGahn describes the issue as a looming crisis: “Building equity shouldn’t come with a penalty—it should come with opportunity.” Without reform, McGahn warns, the number of Americans caught off guard by tax bills will only grow.

This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.