New Cotality data shows 147% home price growth is outpacing frozen federal tax thresholds
One in four California homeowners now pocket more than $500,000 when they sell their primary residence. That's a profit that triggers a capital gains tax bill under federal rules that have not been updated in nearly three decades, according to new analysis from real estate data firm Cotality.
US home values have risen 147% over the past 15 years, per Cotality's data, while the Internal Revenue Service's Section 121 exclusion has stayed frozen at $250,000 for single filers and $500,000 for married couples filing jointly since the Taxpayer Relief Act of 1997. The result is a generation of homeowners who are, on paper, wealthy, but constrained in practice.
A coast-to-coast supply squeeze
The pressure is spreading beyond California's borders. In Hawaii, 21% of sellers now exceed the exemption threshold. In Washington state, 19% do — despite median prices running nearly $100,000 below California and Hawaii, a signal that appreciation has been steep and compressed in those markets, according to Cotality's findings.
"Homeownership continues to be a cornerstone of wealth-building, yet stagnant capital gains thresholds are increasingly influencing how — and when — homeowners can access those gains," said Archana Pradhan, Principal Economist at Cotality.
The supply consequences are direct and measurable. Rather than downsize, relocate, or time a retirement sale as originally planned, many homeowners are choosing to stay put, quietly withholding listings from a market that has already struggled with inventory shortages.
For brokers operating in supply-constrained metros, Cotality's findings add a structural layer of reluctance that no rate movement alone can unwind.
Read more: Home prices hold firm as ‘hibernating’ market tests buyers and lenders
Beyond the coasts
Cotality's state-level data extends the story well past the Sun Belt and Pacific Coast.
South Dakota saw the number of homeowners surpassing the exemption threshold double over two years.
West Virginia moved up four spots in the national rankings, a clear indication that this is no longer a coastal phenomenon.
"The equity is real, but outdated capital gains thresholds limit how flexibly homeowners can access it, reducing its role as a liquid wealth-building tool," Pradhan said.
For brokers navigating purchase pipelines, the friction compounds. Potential move-up sellers and downsizers are, in growing numbers, calculating their tax exposure before they calculate their next mortgage.
The new listings drought that has tested the US housing market through 2026 has multiple drivers — and, Cotality's analysis suggests, frozen tax policy is one of them.
Separately, as wealthy buyers push US home prices to record highs, the gap between those who can transact freely and those effectively locked in by tax rules is widening further.
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