Realtor.com/Getty Images
For generations of American homeowners, the family home wasn’t just a place to live—it was the plan. Buy early, stay long, and let appreciation build a nest egg to help fund retirement. But for millions of older adults, that promise is unraveling due to a tax that was never meant to target them, and a policy that hasn’t kept pace with the housing market.
Under current federal law, homeowners can exclude up to $250,000 in capital gains from the sale of a primary residence if they’re single, or up to $500,000 if they’re married and filing jointly. Any profit above that is taxed at a rate that can be as high as 20%, depending on income.
The exclusion was originally designed to protect everyday homeowners from a tax that was meant for the wealthy, but it hasn’t been adjusted since 1997—and now, more middle-class homeowners are slipping through the cracks. If it had kept pace with inflation, the cap would be more than double today: around $660,000 for individuals and $1.32 million for couples, according to research from the University of Illinois Chicago.
As home prices have soared more than 260% since 1997, more retirees are discovering that selling means surrendering a significant share of their equity to the IRS. What was once a reliable path to financial security is lined with costly, unintended consequences, and it’s seniors who are paying the price.
What is the home equity tax—and why is it hitting seniors hardest?
The home equity tax isn’t a new levy, but for many retirees, it seems like one. Because the capital gains tax exclusion thresholds haven’t been adjusted since 1997, more long-term homeowners are now exceeding them, especially in markets where property values have skyrocketed.
Nationally, 31.6% of homeowners over the age of 65 exceed the single filer exclusion limit. And in eight states plus Washington, DC, over half of senior homeowners are over the exclusion limit.
This issue disproportionately affects seniors simply because of bad timing. Older homeowners are more likely to have lived in their homes for decades, which means they’ve built up more equity. Likewise, many have already paid off their mortgages, so there’s little debt to offset those gains.
Seniors face higher liabilities than the general population
Not only are more older homeowners exposed to the hidden home equity tax, they’re also more likely to get hit with a higher tax liability.
Despite having similarly valued homes on average, senior homeowners face an average federal tax liability of $41,232 when selling, compared with $34,732 for the general population, according to research from the University of Illinois Chicago
Even for married couples who qualify for the $500,000 exemption, the pattern holds. Seniors still face more exposure than their younger counterparts with similarly priced homes, simply because they’ve owned their homes longer and seen more dramatic appreciation.
States with the highest senior tax burdens
While the home equity tax affects older homeowners nationwide, some states pose far steeper challenges than others, especially those with high property values and strong long-term appreciation.
These are the top five states for average senior tax liability on home sales:
- Wyoming: $105,201
- Hawaii: $91,664
- California: $86,215
- Washington, DC: $82,721
- New York: $70,493
And in just five years, those numbers are expected to swell:
- Hawaii: $153,674
- California: $150,783
- Washington, DC: $133,680
- Wyoming: $113,022
- Montana: $91,482
By 2035, the average older homeowner in California who exceeds the exemption is projected to face a staggering $232,968 in federal tax liability on the sale of their home. Eleven other states are expected to cross the $100,000 average liability mark as well, highlighting how static federal policy is clashing with the reality of today’s (and tomorrow’s) housing market.
How the home equity tax penalizes downsizing or aging in place
For decades, downsizing in retirement was seen as a way to unlock the wealth tied up in a home. But as more longtime homeowners brush up against the capital gains exclusion limits, selling has become financially fraught.
Many retirees are choosing to stay put because it’s the least financially punishing. Some feel “locked in” by low or paid-off mortgages they’d lose if they moved. Others are deliberately holding on to their homes so they can pass them on to heirs tax-free, thanks to the stepped-up basis rule, which avoids the capital gains tax altogether.
The result is a growing class of homeowners aging in homes that might be too large, expensive, or difficult to maintain.
A growing problem: What happens by 2035?
The impact of the home equity tax is accelerating. By 2035, the number of older homeowners exposed to capital gains taxes is expected to grow dramatically from 31.6% today to 54.9% of homeowners aged 65 and older over the single filer limit.
The trend is especially stark in states experiencing rapid in-migration of retirees and fast-rising home prices. In Nevada, Arizona, and Florida—all popular retirement destinations—more than 75% of older homeowners are projected to be exposed to capital gains taxation by 2035. These are places where retirees are flocking for affordability, but where that very demand is driving appreciation and tax exposure sky-high.
Unless the exclusion thresholds are updated or indexed to inflation, a growing share of the nation’s retirees will be taxed on the very housing wealth they expected to rely on in their later years.
What could fix it—and who’s paying attention?
For years, serious momentum for reform has been limited. But that could be changing.
In July 2025, U.S. Rep. Marjorie Taylor Greene (R-Georgia) introduced the No Tax on Home Sales Act, a proposal to entirely eliminate the federal capital gains tax on the sale of a primary residence.
Framing it as “a gift to the American people,” Greene argues the tax unfairly penalizes homeowners—especially empty nesters and retirees—who are simply trying to unlock the equity they’ve spent decades building.
“They get penalized so much [by capital gains taxes] because of the large amount of equity they’ve gained,” she recently told Realtor.com® in an exclusive interview.
The bill has gained support from President Donald Trump, who called the proposal “a very big positive.”
Still, the idea faces long odds. The estimated $6 billion price tag could draw resistance in a divided Congress, especially after the passage of a slew of tax cuts in the recent One Big Beautiful Bill Act.
Critics also argue that eliminating the tax could disproportionately benefit wealthier homeowners in expensive markets and might do little to ease the nation’s housing shortage overall.
But at the heart of the debate is a larger question: Should housing wealth be treated differently in retirement?
For millions of older Americans, home equity is their financial cornerstone. It’s how they plan to pay for health care, move closer to family, or afford assisted living. And as the number of homeowners exposed to the exclusion limit continues to rise, calls to modernize the policy might grow louder.