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In Vermont, home values have climbed sharply in recent years—especially in popular areas like Burlington, Montpelier, and Stowe. But that appreciation now carries a costly catch for more than one-third of homeowners.
According to the National Association of REALTORS®, 35.6% of Vermont homeowners exceed the federal capital gains tax exclusion.
That means selling could trigger what housing economists call a “hidden home equity tax,” draining equity that’s often earmarked for retirement, long-term care, or inheritance.
A 1997 tax rule still in effect
Under current federal law, homeowners can exclude up to $250,000 in profit from the sale of a primary residence—or $500,000 for married couples filing jointly. These limits were enacted in 1997 and haven’t changed in nearly three decades. Meanwhile, home prices have surged more than 260% nationwide.
In Vermont, this outdated rule translates into real dollars. The average appreciation above the $250,000 limit is $143,908. For the 7.9% of homeowners who exceed the $500,000 threshold, the average gain is $192,692. These homeowners could face a federal tax bill of $33,660 on top of any other closing costs.
And Vermont adds another layer. The state taxes capital gains as regular income, with rates reaching as high as 8.75%—among the highest in the U.S.. That state tax further amplifies the hit sellers face after building equity for decades.
(Realtor.com)
A high-tax state with rising exposure
Vermont’s 35.6% exposure ranks it high among Northeast states, following closely behind New York (46.1%), Rhode Island (47.2%), and Massachusetts (62.3%), second highest in the nation. As home prices rose across the region—driven by pandemic in-migration, remote work shifts, and limited inventory—many properties that once fell safely below the capital gains threshold now far exceed it.
That includes longtime family homes and even modest second homes that appreciated over time. What was once viewed as “safe equity” has now become a tax liability, especially for older owners who might want to sell and downsize.
Looking to 2035: a mounting concern
This issue is not unique to Vermont, and it’s projected to grow. Nationwide, the National Association of REALTORS® estimates that by 2035, nearly 70% of U.S. homeowners will exceed the $250,000 exemption, and over 38% will top $500,000.
For Vermont, that means many more residents could be subject to what experts have dubbed the “stay-put penalty”—where homeowners opt not to sell simply to avoid paying tens of thousands in taxes. That choice, while understandable, slows market turnover and limits the housing options available to younger families or first-time buyers.
The result is a gridlocked housing market where equity-rich homes remain off the market and affordability continues to worsen.
A possible solution: the ‘No Tax on Home Sales’ act
To address these challenges, the More Homes on the Market Act is gaining attention. The proposed legislation would double the capital gains exemption to $500,000 for individuals and $1 million for married couples—and crucially, index it to inflation.
This change would restore the law’s original purpose: protecting middle-class homeowners from being penalized for doing exactly what financial advisors have long recommended—invest in real estate and stay put.
Additionally, Representative Marjorie Taylor Greene from Georgia, introduced a bill on July 10 that, if passed, would eliminate federal taxes on home sales entirely.
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 Vermont, struggling with affordability issues and encourage mobility in the U.S. housing market.
Until then, Vermont homeowners should take stock. The equity they’ve built may carry a hidden cost—one that could affect retirement plans, family transitions, or long-term financial security.
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.