When Building Equity Becomes a Barrier to Moving

Originally published in the REALTOR® Association of the Fox Valley newsletter. Republished here as part of Neeley Erickson’s Policy Commentary series.

For many homeowners, building equity is the goal. It represents stability, progress, and often a long-term path to financial security.

‍But what happens when that equity becomes a reason not to move?

‍That is exactly the situation we are starting to see play out in today’s housing market.

‍Under current law, homeowners can exclude up to $250,000 in capital gains from the sale of a primary residence, or $500,000 for married couples filing jointly, if they meet certain requirements. Those limits were set in 1997 and have not been adjusted for inflation.

‍As home values have increased, more homeowners are finding themselves closer to or above the capital gains threshold when they consider selling. That creates hesitation.

‍Selling a home is no longer just about timing the market, relocating, or downsizing. It can also mean taking on a tax burden many homeowners did not anticipate when they purchased their home years ago.

‍What many in the industry refer to as the “lock-in” effect is often tied to mortgage rates, but it does not stop there. Financial considerations like capital gains are also playing a growing role in keeping homeowners in place, especially for seniors and those who have experienced life changes such as the loss of a spouse, where timing and tax implications can significantly affect their decision to sell.

‍Homeowners stay put longer. Inventory remains tight. Buyers at every stage feel the impact.

‍This issue is not theoretical. It is already affecting homeowners across the country. The age of a first-time homebuyer has risen to 40, and in the Chicago area, the median homeowner is now more than 56 years old, up four years from 2010, according to the National Association of REALTORS®. These trends point to a housing market where turnover is slowing, and fewer homes are becoming available for the next generation of buyers.

‍Recent analysis highlighted through a national interactive map shows a growing share of homeowners are at risk of exceeding the capital gains threshold if they sell. In Illinois, many long-term homeowners are approaching or surpassing that limit simply due to appreciation.

‍When homeowners in Illinois choose not to sell because of potential tax consequences, it reduces available inventory in local markets. That has a ripple effect on affordability, workforce mobility, and overall community growth.

‍According to the National Association of REALTORS®, 12.5% of Illinois homeowners have already surpassed the $250,000 capital gains exclusion for individual filers, and another 2.4% have exceeded the $500,000 threshold for couples filing jointly. Illinois also taxes capital gains as regular income, at rates up to 4.95%, meaning any federal tax burden can be compounded at the state level, particularly for long-term homeowners. That double whammy hits hard.

‍Housing policy does not exist in a vacuum. Decisions in one area influence outcomes in another. When policies unintentionally discourage homeowners from selling, it limits opportunities for first-time buyers, growing families, and those looking to downsize.

‍ A healthy housing market requires balance.

Efforts like the proposed More Homes on the Market Act aim to address part of this issue by updating and indexing the capital gains exclusion for inflation. That is an important step.

‍However, policies created decades ago can have very different impacts in today’s market. If we want to improve housing affordability, increase inventory, and support mobility, we need to take a closer look at those that may be working against these goals.

‍Updating capital gains policy is not just about taxes. It is about unlocking opportunity across the housing market. We should also consider how tax policy can better encourage the transition of investment properties into homeownership to address ongoing supply challenges.

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Strong housing policy begins with clear data, thoughtful collaboration, and a shared commitment to expanding opportunity for every community.

—Neeley Erickson

Neeley Erickson is a Government Affairs Director specializing in housing policy, local governance, and community development across Illinois. Her work focuses on advancing practical solutions that expand housing opportunity and strengthen communities.