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Washington state’s meteoric rise in home prices has created substantial wealth for longtime residents—but many are finding that windfall comes at a cost.
According to the National Association of REALTORS®, 64.8% of homeowners in Washington now exceed the federal capital gains tax exemption. That makes Washington one of the most heavily impacted states in the country.
This growing financial burden is being called the “hidden home equity tax,” and it’s reshaping the housing landscape from Seattle to Spokane.
1997 tax caps meet 2025 prices
The federal capital gains tax exclusion allows sellers to exempt up to $250,000 in gains from the sale of a primary residence—or $500,000 if married and filing jointly. But these limits were set in 1997 and haven’t budged in 27 years. Meanwhile, home prices have soared nationwide, with cumulative inflation pushing values more than 260% higher.
Washington exemplifies the gap between outdated tax policy and modern housing markets. Homeowners with gains above the $250,000 threshold have an average taxable appreciation of $240,827. For the 24.7% of households that exceed the $500,000 cap, the average gain subject to taxation is $219,114. That could translate to a federal tax bill of $45,994.
And that’s not the only cost.
Washington state also imposes a Real Estate Excise Tax (REET), which ranges from 1.1% to 3% depending on the sale price. For sellers unloading high-value properties, that can mean thousands more at closing.
(Realtor.com)
One of the most exposed states in the U.S.
Among all 50 states, Washington ranks near the top in terms of capital gains tax exposure. It trails only Hawaii for the percentage of homeowners above the $250,000 exemption level. With nearly two-thirds of all homeowners over the federal threshold, the effects are being felt across the Puget Sound region and beyond.
Fast-growing areas like Bellevue, Redmond, and even parts of Eastern Washington such as Spokane and the Tri-Cities are now grappling with the financial consequences of home appreciation. Many long-term owners—especially retirees—are choosing not to sell simply to avoid steep tax bills. That’s contributing to a broader housing shortage, reducing inventory and pushing prices even higher.
Looking ahead to 2035
Nationally, the capital gains burden is set to grow dramatically. The National Association of REALTORS® projects that by 2035, 69.3% of U.S. homeowners will exceed the $250,000 exclusion, and more than 38% will top the $500,000 mark.
Washington, already ahead of that curve, is poised to see even more homeowners hit by this tax if no changes are made. That’s prompting concerns about a “stay-put penalty,” where homeowners delay selling their properties due to the tax consequences. This reduces mobility, slows turnover, and tightens housing supply across the board.
This dynamic is already visible in many of Washington’s suburban and retirement communities, where high home values now act as a disincentive to move.
A proposed fix from Congress
To address this growing challenge, the More Homes on the Market Act has been introduced in Congress. The bill would double the federal capital gains exclusion to $500,000 for individuals and $1 million for couples. It would also index those limits to inflation—ensuring that future gains reflect modern market realities.
This was followed by Representative Marjorie Taylor Greene from Georgia, introducing 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 Washington, struggling with affordability issues and encourage mobility in the U.S. housing market.
Until then, Washington 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.