Hidden Home Equity Tax Explained
The “Hidden Home Equity Tax” is just a catchy name for federal capital gains taxes that surprise a lot of unwary sellers. It especially snags homeowners who’ve reached a life stage where they have a lot of home equity built up. Even though home prices have been very high, the capital gains exclusion has lagged inflation so more home sellers are facing owing taxes when they sell.
Home sellers can already exclude $250,000 (or $500,000 if married) of profit from federal capital gains tax—but those limits were last increased in 1997. After inflation, that’d be about $660,000 or $1.32 million today.
As a result of this inflation mismatch, almost 1 in 3 U.S. homeowners are already at risk for this tax. Or, in raw numbers, that’s about 29 million households
Why Texas Homeowners Are Especially Susceptible
- In Texas, nearly 1 in 3 homeowners could owe the “hidden” tax when they sell.
- Home prices have skyrocketed in much of Texas, including hot markets like Austin, Dallas–Fort Worth and Houston. Long-term owners who bought long ago could see their profits top the federal exclusion without even realizing it.
Seniors: Hit the Hardest
Retirees and older homeowners, in particular, are impacted:
- They have often been in their homes for decades, slowly building equity
- As prices increase, they more easily surpass the exclusion threshold
- As a result, they may face surprise tax bills of up to 20% on home sale gains
What’s Being Done (and What’s Being Proposed)
Freeze on capital gains exclusion limits—but political interest is being paid:
- Solution: The No Tax on Home Sales Act, sponsored by Rep. Marjorie Taylor Greene, would abolish federal capital gains tax on the sale of a principal residence (for ordinary homeowners, not investors or house-flippers)
- Ask: The National Association of REALTORS® is on board, saying, “A homeowner shouldn’t be taxed like an investor”
- Follow-Up: Related reform is also on the table—increasing the SALT deduction cap and estate/gift tax exemption amounts—to provide some much-needed relief on related homeownership costs. (Note: The cap on SALT deductions, in particular, has already been increased significantly, from $10,000 to $40,000)
Taxpayer-Friendly Initiatives in Texas
Texas is also enacting a number of more direct measures to lighten homeowners’ tax load:
- Senate Bill 2: The Property Tax Relief Act increased the homestead exemption from $40,000 to $100,000, as well as enshrining senior homeowner protections and enacting circuit breakers to cap non-homestead appraisals at 20% per year on $5 million or less .
- Future legislation: Legislation is being discussed to further increase the homestead exemption to $140,000, providing even greater tax relief to Texans, particularly those on a fixed income .
- Propositions: Texans will be voting on a couple propositions in November 2025 that could result in an additional $51 billion in property tax relief, including significant cuts to school taxes and business property taxes. The average senior or disabled homeowner could save nearly $939 per year.
Why It Matters: The Big Picture
- Trap for Families: Homeowners with significant equity may feel trapped if they have to pay taxes upon selling, deterring them from downsizing or moving.
- Harder on Seniors: Long-time homeowners, many of whom are retirees living on fixed incomes, face both the capital gains tax and increased property taxes.
- Move-Up Market Chilled: These taxes can disincentivize owners from moving, downsizing, or retiring—restricting housing supply and mobility.
- Outdated Policy: The thresholds for exclusion highlight the need for reforms that consider current home prices.
What Should Texas Homeowners Do?
1. Figure out your capital gain
Keep track of your purchase price, improvements (renovations, etc.) and any cost basis adjustments. Then, estimate your selling price to see if it would put you over the exclusion.
2. Take advantage of deductions
If you’re married, file jointly to bump up your exclusion to $500,000. Keep records of home improvements to help offset taxable gain.
3. Watch for relief measures
Follow federal and state tax bills as well as possible referendum items that could reduce or wipe out your tax liability.
4. Seek a tax professional
They can help you evaluate nuances, such as timing the sale, how to structure exclusions and exemptions and other strategies.
Texas homeowners are standing on a home equity bonanza—but for many that equity is not tax-free. Nearly one-third of Texans could face taxes when they sell, and seniors are particularly vulnerable. But increased attention in the works on both sides of the Capitol—as well as in D.C.—offers hope of change. In the interim, education, planning and strategic use of exemptions can prevent surprises.
