The $250,000 / $500,000 Capital Gains Cap: A Growing Issue for Northern Virginia Homeowners

By Tracey Barrett, Associate Broker – FOCUS on NoVA Real Estate®

For years, homeowners have relied on one of the most homeowner-friendly provisions in the tax code: when you sell your primary residence, many sellers qualify to exclude up to $250,000 of gain if filing singly or up to $500,000 if married filing jointly under Internal Revenue Code §121.

That exclusion was enacted in 1997 and, unlike many other tax provisions, has never been adjusted for inflation. But fast-rising home values over the last two decades have put increasing pressure on a cap that was never meant to reflect today’s pricing environment.

NoVA Homeowners: Are You at Risk of Exceeding the Capital Gains Tax Cap? You may want to review your tax position if:

You bought your home before 2010
Your home value has more than doubled
You’re considering downsizing or relocating
You’ve made significant renovations

A CPA can help estimate your likely taxable gain using IRS worksheets in Publication 523.

Why This Matters More Now Than Ever: Appreciation Has Outpaced the Tax Exclusion
Nationally, home prices have climbed dramatically since the late 1990s. According to the Federal Housing Finance Agency’s All-Transactions House Price Index (HPI), U.S. home prices have more than tripled since 1997. And the Washington-Arlington-Alexandria metro—Northern Virginia’s housing market—has seen similar, if not stronger, long-term gains.

At the same time, many NoVA homeowners have owned their homes for 10+ years, during which values climbed in ways unimaginable two decades ago. When sales prices outpace the fixed $250K / $500K exclusion, taxable gain can result. Current Local Sales Trends Amplify the Issue. Recent market data from the Northern Virginia Association of Realtors (NVAR) shows a regional median sold price routinely north of $700,000, reflecting strong demand and high valuations.

The Real-World Implications For Homeowners
1) Some Sellers Could Owe Capital Gains Tax for the First Time
Your capital gain generally equals: Sale Price − Selling Costs − Adjusted Tax Basis
Adjusted basis includes your original purchase price plus documented capital improvements. If appreciation pushes your gain above the exclusion limit, your taxable gain may be subject to federal capital gains tax. The IRS outlines these rules and worksheets in Publication 523: Selling Your Home.

2) “Lock-In” Effects Can Keep Supply Off the Market
Economic research—including summaries by the Congressional Research Service—notes that as prices rise, a stagnant capital gains exclusion may increase the share of gains subject to tax and discourage sales. The National Association of Realtors (NAR) has publicly highlighted how outdated exclusions may contribute to limited inventory and reduced mobility.

Policymakers Are Talking About Solutions — But No Law Has Changed Yet.

Proposal A: Increase & Index the Exclusion
One active federal proposal—H.R. 1340, the “More Homes on the Market Act”—would raise the exclusion amounts and index them for inflation. Supporters argue this would update a decades-old rule and reduce the tax disincentive to sell, without eliminating the exclusion entirely.

Proposal B: Eliminate the Cap Altogether
Another bill, H.R. 4327, the “No Tax on Home Sales Act”, would remove the dollar limitation on the exclusion for primary residences entirely. Media coverage from major outlets confirms that federal policymakers are actively debating such options, though none have become law as of this writing. Critics worry that broad removal of the cap would disproportionately benefit high-value sellers and reduce federal revenue.

Why Northern Virginia Homeowners Should Care? If you bought your home:

Prior to 2010
In a neighborhood where values have soared
And you’ve made significant improvements

…it’s increasingly possible that your gain exceeds the $500,000 married filing limit—or might soon.

For example, an owner who purchased at $350,000 in 2005 and sells today for $900,000 may have more than $500,000 of gain—even after improvements and selling costs. That’s not a hypothetical—it’s an outcome driven by decades of appreciation that the capital gains exclusion wasn’t designed to handle.

A Final Word
Rising home values have generated substantial wealth for Northern Virginia homeowners, but tax rules set in a very different era haven’t kept pace. Even if current legislative proposals don’t become law this year, awareness and planning are essential.

Thinking about selling? Let’s talk about market fundamentals, and how the capital gains rules may affect your timing and net proceeds.

Sources & Further Reading