One in four California home sellers now records more than $500,000 in gains after selling their primary home, new data shows. It's some of the clearest evidence yet that more sellers are being pushed beyond the federal capital gains tax exclusion.
The analysis, from property analytics company Cotality, found that California has the highest share of sellers reaching that level nationwide. Under current federal rules, qualifying married couples filing jointly can exclude up to $500,000 in gains from a primary-home sale. For single filers, the limit is $250,000.
“Rapid home price appreciation, long ownership tenures, high housing costs, supply shortage, and outdated tax threshold make California homeowners particularly vulnerable to capital gains exposure,” Archana Pradhan, principal economist at Cotality, tells Realtor.com®.
Last year, Realtor.com broke the story on how those forces had turned a once-generous tax provision into a hidden home equity tax, exposing more ordinary homeowners to an unexpected tax burden while tightening the nation's already strained housing supply.
"Reports like this reinforce what Realtors® are seeing every day and what NAR’s research has shown for years: the home equity tax has become a growing barrier to housing mobility," Shannon McGahn, executive vice president and chief advocacy officer of the National Association of Realtors®, tells Realtor.com. "While California has long been one of the clearest examples because of its high home values, our research shows this issue is no longer isolated to a handful of high-cost markets."
The latest data shows how that exposure is now materializing. In Pradhan’s words, “The current numbers show how far housing market conditions have moved beyond the tax law’s original intent.”
Why so many Californians are exposed to the hidden home equity tax
California is an unusually clear case study for the national housing crisis. If the U.S. market has changed since the exclusion limits were set in 1997, California’s has become almost unrecognizable.
The meaning of a million-dollar home is a good example. In 1997, the price point was synonymous with a mansion or other luxury listing—and overall, a relatively uncommon occurance, Pradhan says.
“Today, they are widespread in many California markets, meaning a provision originally aimed at a narrow group of affluent households is increasingly affecting ordinary longtime homeowners," she adds.
And that price point is not necessarily for luxury homes—the humble starter home has crossed the $1 million mark in 28 states. In California, the changing meaning of a million-dollar listing has been even more extreme.
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Five of the 10 U.S. metros with the highest thresholds for luxury listings are in California—Los Angeles, San Jose, Oxnard, San Diego, and San Francisco—according to data from Realtor.com.
In Los Angeles, a home doesn’t even enter the top 10% of listings until it crosses the $4.1 million mark. In San Jose, that threshold is about $3.25 million. And across all five California metros in the top 10, there are an average of more than 15,600 million-dollar listings annually.
So, a million-dollar home is far from an outlier in many parts of the state. And as home prices have climbed to new highs in these metros, so has capital gains tax exposure.
About 63% of homeowner households in San Jose have unrealized gains above their applicable exclusion threshold, according to an NAR analysis. In San Diego, the share is about 54%.
Why longtime homeowners face greater exposure
But high prices alone don’t explain California's, or the nation's, growing exposure. Homeowners in the Golden State also tend to stay put longer, giving years of appreciation more time to accumulate before a sale.
The typical California seller today has owned their home for just under 11 years, according to real estate data firm ATTOM. That's the fourth-longest average tenure of any state in the nation. Over roughly that same period, home prices there have risen more than 93%.
As a point of comparison, nationally, sellers today have owned their homes for about 8.5 years, during which home prices have risen roughly 70%.
So longer tenure gives faster appreciation more momentum to push even modest homes toward the exclusion threshold. And for homeowners who have stayed much longer than the typical tenure—like many senior residents—the effect can be especially dramatic.
Take today’s median-priced California home, worth about $785,000. Based on the state’s Home Price Index, a comparable home would have been worth roughly $280,000 around 2002. This means a homeowner who bought around the middle of the market just 24 years ago could have accumulated more than $500,000 in gains by selling at today’s median.
The risk is wider than just California
California may be the most extreme case, but it’s far from the only one. Cotality found that 21% of sellers in Hawaii and 19% in Washington also recorded gains above $500,000.
The phenomenon extends well beyond those three states. Earlier this year, the NAR estimated that more than 13.1 million homeowners nationwide would exceed today’s applicable capital gains exclusion if they sold.
"Without action, that number is projected to grow by 1.3 million by 2030 as home values appreciate," says McGahn. "Another study shows the number by 2030 could be 20 million, or 23% of owner-occupied homes."
To understand how that number has spiraled, it helps to zoom out from any specific market and take a holistic view of how the economy has changed since Congress set the current limits.
National home prices have more than tripled since 1997, rising from about $129,000 then to more than $419,000 today. At the same time, inflation has steadily chipped away at what the exclusion itself is worth—cutting its real purchasing power roughly in half.
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If the exclusion had kept pace with the consumer price index, it would be worth roughly $1.04 million today.
Kenneth Kies, who was chief of staff of Congress’ Joint Committee on Taxation when the provision was written and has said the exclusion was his idea, acknowledged that flaw earlier this year.
“Obviously, inflation has eroded the value of the benefit,” Kies said in May.
Congress is considering raising the home-sale tax exclusion
But there is good news. The growing exposure has helped fuel a bipartisan effort to update the limits.
In April, Sen. Ted Cruz (R-TX) proposed indexing all capital gains to inflation—a move that would apply to stocks and other assets, not just primary homes. In June, Rep. Nicole Malliotakis (R-NY) proposed a bill that would create a three-year tax holiday for older homeowners selling a primary residence they had owned for at least 25 years. And last year, then-Rep. Marjorie Taylor Greene (R-GA) introduced a bill that would have eliminated the tax on primary home sales altogether, in what she described to Realtor.com in an exclusive interview as "a gift to the American people."
The proposal with the most bipartisan momentum is the More Homes on the Market Act, introduced by Rep. Jimmy Panetta (D-CA).
The bill would double the current exclusion limits to $500,000 for single filers and $1 million for married couples filing jointly, while indexing both thresholds to inflation going forward.
"It’s a practical, bipartisan solution that would help unlock existing housing supply, improve affordability, and allow more Americans to move without facing an outdated tax penalty," McGahn says. "And it’s the fair thing to do because almost all those paying taxes on home sales today are victims of an outmoded tax code provision driven by inflation. And so are those who are unable to find the homes they need."
NAR has made passage of the bill a major legislative priority. According to McGahn, 7,000 Realtors came to Washington during the group’s legislative meetings, and NAR also launched a national call to action in support of the measure.
The group’s argument is straightforward: The existing exclusion can discourage some long-tenured homeowners—particularly older Americans with substantial accumulated gains—from selling.
“Just like people were locked into their homes at lower interest rates, seniors are often locked in because of the home equity penalty,” NAR President Kevin Brown said during Senate testimony in June. “This legislation expands existing housing stock and gives seniors the opportunity to tap equity that they have counted on for retirement.”
The latest data now makes those stakes clearer than ever: More homeowners are running up against a tax threshold designed for a very different housing market.
Allaire Conte is a senior advice writer covering real estate and personal finance trends. She previously served as deputy editor of home services at CNN Underscored Money and was a lead writer at Orchard, where she simplified complex real estate topics for everyday readers. She holds an MFA in Nonfiction Writing from Columbia University and a BFA in Writing, Literature, and Publishing from Emerson College. When she’s not writing about homeownership hurdles and housing market shifts, she’s biking around Brooklyn or baking cakes for her friends.
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