In Indiana, where real estate has traditionally been affordable, a growing number of homeowners are discovering that selling their home could come with a steep and unexpected tax bill.
As property values rise across the state, outdated federal tax rules are catching more sellers off guard.
According to the National Association of REALTORS®, 13.0% of Indiana homeowners have now exceeded the $250,000 capital gains exclusion for individual sellers. Another 1.6% are over the $500,000 cap for couples filing jointly. While those percentages may sound modest, they translate to over 250,000 Indiana households at risk of being taxed on the equity they’ve built—just by staying in place.
Old tax caps, new market realities
The current capital gains tax exemptions—$250,000 for individuals and $500,000 for joint filers—were introduced in 1997. They haven’t changed since. Meanwhile, home prices have surged more than 260% nationally.
Had those thresholds been indexed to inflation, today’s limits would be more than $660,000 and $1.32 million. But in Indiana, homeowners who bought their homes decades ago and stayed put are now learning that capital gains tax on a home sale could apply—even when their gain was entirely passive.
Indiana also taxes capital gains as part of its flat income tax, which currently sits at 3.15%. Combined with federal taxes, many sellers could face liabilities that cut deeply into their expected profits.
A market squeeze for longtime owners
Appreciation has taken off across Indiana in recent years, particularly in metropolitan areas like Indianapolis, Fort Wayne, and Bloomington. Many homeowners who bought before the housing boom have now seen values double or triple.
According to NAR estimates, the average homeowner who exceeds the $250,000 limit in Indiana will owe tax on about $77,083 of additional gain. For those above the $500,000 threshold, the taxable average jumps to $131,718.
As awareness of these liabilities grows, many are opting not to sell at all. Experts refer to it as the “stay-put penalty”—when homeowners feel trapped by taxes, they delay selling, reducing the number of homes on the market and tightening inventory for everyone.
What’s coming by 2035
The issue is only expected to worsen. By 2035, nearly 41.4% of Indiana homeowners are projected to exceed the $250,000 cap, and 8.2% will cross the $500,000 threshold. That would mean the majority of longtime sellers in Indiana will face some form of capital gains tax.
This rising tax exposure is a major contributor to the slowdown in the housing market. Homes are staying off the market longer, and the ripple effects are felt by younger buyers and growing families.
A legislative fix in the works
To relieve the pressure, lawmakers are proposing the More Homes on the Market Act, which would double the capital gains exclusion and index it to inflation. That change could restore balance and help more sellers unlock their equity without being penalized.
“Equity shouldn’t be a trap,” says Shannon McGahn, chief advocacy officer at the National Association of REALTORS®. “It should be a stepping stone for the next chapter”.
Until then, Indiana homeowners should consult with a tax advisor and consider the timing of their sale. Learning how capital gains tax works on real estate could help keep more hard-earned equity in their pocket.
