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Why More Homeowners Are Getting Hit with Capital Gains Taxes—and What You Can Do About It
As home prices soar across the country, an increasing number of longtime homeowners are facing an unexpected financial burden when it comes time to sell: capital gains taxes.
Despite tax exemptions for primary residences—$250,000 for single filers and $500,000 for married couples—those thresholds haven’t changed since 1997. With home values having more than doubled in many markets since then, many sellers are discovering that these outdated limits no longer provide sufficient protection.
The Numbers Tell the Story
According to housing data from CoreLogic, nearly 8% of homes sold in 2023 triggered capital gains taxes that exceeded the federal exemption cap. That’s a dramatic jump from just 1.3% of sales in the early 2000s. The peak came in 2022, when over 300,000 home sales reported taxable gains above the limit—a 140% increase from pre-pandemic levels.
States with the most appreciation—such as California, Florida, New York, and Massachusetts—have been hit hardest. Between 2017 and 2024, these five states accounted for 68% of all taxable capital gains above the exemption threshold.
Staying Put Can Cost You
Interestingly, homeowners who stay in one home for decades may end up paying more in taxes than those who gradually trade up every few years. This is because each time you sell a primary residence, you can reset your tax exemption—effectively shielding more of your cumulative gains from taxation.
With inflation and home prices climbing steadily, many believe it’s time for lawmakers to adjust the exemption thresholds to reflect today’s housing market. Until then, homeowners facing a large tax bill may want to explore alternative strategies to reduce or defer their tax liability.
Strategies to Reduce Capital Gains Exposure
If you’re sitting on substantial home equity and facing a sizable capital gains bill, consider these options:
- Convert to a Rental and Use a 1031 Exchange
You can move out of your primary residence, convert it into a rental property, and then use a 1031 exchange to defer the capital gains tax when you sell. The key? The property must be held as an investment for a certain period before the exchange. The funds can then be rolled into other types of income-producing real estate—such as apartment syndications, commercial buildings, or even self-storage facilities.
Need to buy a new primary residence? You could pull cash out through a HELOC (paid for by the new investment’s cash flow) or set aside a portion of the sales proceeds, pay taxes on that amount, and use it to purchase a home.
- Offer Seller Financing (Hold the Note)
Instead of receiving a large lump sum at closing, you can act as the lender and receive monthly payments from the buyer. This structure spreads out the capital gains over several years, often lowering the annual tax hit. This “installment sale” strategy also provides predictable cash flow and allows for more favorable tax treatment of gains.
- Use an Irrevocable Trust to Transfer Wealth
If your long-term goal is to pass down your home to your children or heirs, placing the property in an irrevocable trust could be a tax-efficient strategy. Upon your death, the home’s cost basis is stepped up to its market value—meaning your heirs only pay taxes on gains above that value if they choose to sell.
While assets in irrevocable trusts may avoid estate taxes, they are still subject to income taxes depending on how distributions are handled. It’s important to work with an estate planner to determine which trust structure works best for your goals. Keep in mind: once the property is in the trust, it’s no longer under your direct control.
Lifestyle Over Leverage
Not every homeowner wants to become a landlord or juggle complex tax strategies. For retirees or those approaching that stage, simplicity may outweigh tax optimization. Selling, paying the taxes, and enjoying the remaining funds might be worth more than chasing marginal gains—especially when your time and stress levels become more valuable than your next investment return.
But if you’re still looking to stay active in real estate—without the daily headaches—consider reallocating your home equity into passive investment vehicles like real estate syndications, REITs, or triple-net leased properties that require little to no involvement.
Final Thoughts: Long-Term Vision Beats Short-Term Tax Panic
Homeownership has long been a reliable path to wealth, but it now comes with more complexity at the point of sale—especially for those who bought early in high-growth markets. Rising capital gains tax exposure is becoming a reality for more Americans, particularly baby boomers and Gen Xers sitting on decades of appreciation.
Whether you want to minimize taxes, pass wealth to your heirs, or just simplify your financial life, it’s crucial to plan early. The right strategy depends on your age, your tolerance for property management, and your overall financial goals.
And for those thinking about legacy planning? Start the conversation early. You might be ready to pass the baton—but your heirs might still be too busy scrolling TikTok to notice.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Why More Homeowners Are Getting Hit with Capital Gains Taxes—and What You Can Do About It
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“