In California, where home prices have seen decades of uninterrupted growth, many homeowners are discovering that selling their property could come with a steep and unexpected tax bill. Thanks to a federal capital gains exclusion that hasn’t been adjusted since 1997, a majority of California sellers now face what’s increasingly known as a hidden home equity tax.
According to the National Association of REALTORS®, 62.2% of homeowners in California have built up enough equity to exceed the $250,000 capital gains exclusion limit for individuals.
Another 30.8% surpass the $500,000 threshold for couples filing jointly. In one of the nation’s most competitive housing markets, that means millions are exposed to potential taxes on profits they once assumed would be protected.
A 1990s tax rule that no longer fits
The federal capital gains exclusion was created in 1997 to simplify real estate taxes. It allows homeowners to exclude $250,000 in profit ($500,000 for married couples) when selling their primary residence. But those figures were never indexed to inflation…