79.1% of Homeowners in Hawaii Will Face a Hidden Home Equity Tax If They Sell

from Realtor.com, July 7, 2025

In Hawaii, where real estate values are among the highest in the country, long-term homeowners are facing a harsh financial reality: selling their home could come with a hefty tax bill.

Due to a capital gains exemption that hasn’t changed in over 25 years, more than three-quarters of the state’s homeowners now exceed the federal limits—and nearly half could be taxed beyond the joint filer cap.

According to the National Association of REALTORS®, 79.1% of Hawaii homeowners have home equity gains exceeding the $250,000 exemption for single filers, and 46.0% are over the $500,000 limit for married couples. These figures are the highest in the nation, reflecting the steep appreciation seen in markets like Honolulu, Maui, and the Big Island.

Outdated tax caps meet soaring prices

The federal capital gains exclusion was created in 1997 to help homeowners keep more of the profit from selling their primary residence. At the time, the limits—$250,000 for individuals and $500,000 for couples—covered most typical sales. But since then, home prices have skyrocketed nationwide, and even more dramatically in Hawaii.

If the caps had been indexed to inflation, they would now be over $660,000 and $1.32 million. Instead, Hawaii sellers routinely find themselves subject to capital gains tax on real estate, even when their gain reflects years of ownership and routine appreciation.

And while Hawaii’s state capital gains tax rate is lower than its top income tax rate, it still reaches up to 7.25%—a meaningful bite when combined with federal obligations.

Homeowners Face a Stiff Penalty for Staying in Their Homes Too Long—a Hidden Home Equity TaxRealtor.com

A widespread problem in every market

Unlike most states, where exposure is limited to high-value metros, Hawaii’s tax risk is statewide. In fact, the average homeowner in Hawaii who exceeds the exemption faces $409,346 in taxable gain—the highest average in the U.S.. That translates into potential federal tax bills well into six figures for ordinary sellers.

The result? Many homeowners are choosing not to sell, even when it makes personal or financial sense. This “stay-put penalty” is locking up inventory and making it even harder for new buyers to break into the market.

That dynamic is contributing to the housing market freeze, especially in vacation destinations and high-demand coastal areas where long-term owners are sitting on massive appreciation.

A steep climb by 2035

And the road ahead looks even tougher: By 2035, a whopping 96% of Hawaii homeowners are projected to exceed the $250,000 capital gains exemption—while a staggering 87% could soar past the $500,000 threshold, setting the stage for major tax hits in paradise.

This massive tax exposure will likely discourage even more homeowners from selling. That’s bad news for a state already dealing with limited buildable land and a housing affordability crisis. It could also shift how families pass down property, with more owners holding onto homes simply to avoid triggering taxes.

Time for a policy reset?

To address this growing issue, housing advocates are backing the More Homes on the Market Act. The bill would double the exemption limits and tie them to inflation, easing the tax burden for long-term owners.

“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, Hawaii homeowners—especially those with properties held for more than a decade—should review how capital gains taxes apply to home sales and consult a tax advisor before listing. In a state where equity builds quickly, planning ahead is essential to protecting it.

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This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.