Capital gains tax is a tax on any profit (capital gain) you make from selling an investment, including bonds, stocks, or real estate. In Texas, capital gains tax on real estate is simple: there is no tax.
The federal government taxes capital gains even on homes in Texas, which can often lead to questions about how much you’ll need to pay if there are exemptions, and exactly how they are taxed. Learn more about capital gains taxes for home sales in Texas to help navigate and prepare for the tax process.
Are Capital Gains on a Residential Sale Taxed in Texas?
Yes and no. You will be taxed for capital gains on the sale of a home in Texas, but only by the federal government, not by the state of Texas. Texas does not have a state income tax and will not tax capital gains in any situation.
You may be able to avoid capital gains on a residential sale in Texas if you qualify for an exemption or use the money to reinvest into other property using a 1031 exchange.
How the Texas Capital Gains Tax Works
Since Texas has no state income tax, there is no state tax on capital gains, but the federal capital gains tax still applies. Capital gains occur when you sell a capital asset for a higher price than when you bought it. Just as the government taxes you on income, it also taxes any profit or capital gain you have called the capital gains tax.
Capital assets can include digital assets such as NFTs, bitcoins, jewelry, vehicles, coin collections, stocks, bonds, or your home. It’s important to remember that the tax is only based on the realized gains, the actual amount it sold for. Unrealized gains are the potential profit you may see at the sale of the asset. But this number is only a projection and has no bearing on the actual tax you must pay.
You may avoid paying capital gains tax if you qualify for exemptions, such as using your home as your primary residence or making less than $40,400 if single or $80,800 if married. In these cases, your tax rate will be 0%.
The most typical tax rate for those not exempt is 15%, with a rate of 20% if your income is over $445,850 if single or over $501,600 for married filing jointly.
Example: A married couple sold a home for $450,000 that they purchased for $320,000. They sold the home for $450,000 and made a profit of $130,000 on a long-term investment, so they must pay 15% capital gains tax on that profit, or $19,500.
Texas Capital Gains Rate vs. Previous Years
Texas is a no-income tax state, so it has no capital gains tax. The only tax to pay on capital gains is to the federal government. Texas does this intentionally, and in 1993, voters approved Proposition 4, the Texas Income Tax Amendment, which prohibits a personal income tax without voter approval.
Texas vs. Other Large U.S. States
Compared to Texas, capital gains tax on real estate in most other states is taxed, resulting in much higher taxes when selling homes. Remember, in each state, whether or not they have a state income tax, you must pay federal income tax unless otherwise exempt.
New York State ranges from 4-10.9% on capital gains tax.
Florida, like Texas, has no income tax and, therefore, no capital gains tax at the state level.
Short-Term vs. Long-Term Capital Gains Tax Rate in Texas
While Texas has no state capital gains tax, you’ll still need to pay federal taxes. Your tax rate will largely depend on your holding period and your yearly income and exemption status.
Short-term capital gains are made within a year of purchasing the property, while long-term gains are assets you’ve owned for more than a year before selling.
Short-term gains are taxed at the ordinary income tax rate, which is typically much higher than the rates for capital gains. Short-term gain tax rates range from 10-37%, depending on your income and filing status (married or single). Long-term gains can be taxed at 0%, 15%, or 20%, with the majority of sales falling in the 15% category.
Example: Tina and George collectively make $75,000 each year. They bought a house for $300,000. Nine months later, their house is now worth $320,000. If they sold within a year, they would be taxed on the $20,000 at their current income tax rate of 12%, which means they would pay $2,400. If they were to wait until they owned the home for 13 months, they would have 0% capital gains tax because they make less than the $80,800 threshold.
How Capital Gains Tax is Calculated in Texas
To calculate capital gains tax, you must first find how much profit was made on the property that was sold. To find the profit that will be taxed, you will subtract the initial cost or purchase price plus any expenses like closing costs and the costs of improvements to the property from the sale price.
Once you have determined how much profit was made on the sale of the property, you must find out if you have any exemptions. The most common exemption is that the property was a primary residence for at least two of the past five years, which can negate up to $500,000 of capital gains tax.
Once you have checked exemptions, determine if you are paying short-term or long-term capital gains tax. It will be considered long-term if you have owned the property for over a year. Long-term taxes will be taxed at 0%, 15%, or 20%, depending on how much you make each year.
How to Avoid Texas Capital Gains Tax
There are two legal ways to avoid paying capital gains taxes on properties or lowering your tax liability for a particular tax year: exemptions and a 1031 exchange. If you qualify for an exemption, you could be exempt from paying taxes for up to $500,000 if married or $250,000 if single.
According to the IRS, you may qualify for an exemption if all of the following conditions are met:
- You owned the home for two of the last five years.
- You lived in the home for two of the last five years leading up to the date of sale.
- You did not acquire the property through an exchange in the past five years (such as a 1031 exchange).
- You are not subject to the expatriate tax.
- You did not sell another home in the last two years for which you claimed an exclusion.
- You did not use the property as a vacation or rental home after 2008.
- Or you did not use a portion of the home outside the living area for business or rental purposes.
- The sale does not involve the transfer of vacation land or a remainder interest.
A few exceptions to these rules are made for uniformed service members and disabled citizens. Uniformed service members on qualified extended duty may suspend, for no more than 10 years, the 5-year period of ownership and residence.
Even if you have not lived in your home for at least two years during the 5-year sale period, you may still be able to meet the 2-year residence requirement. Qualified extended duty is defined as:
- Serving at a duty station at least 50 miles from your main home or living in government quarters under government order.
- Being called or ordered to active duty for an indefinite period or for more than 90 days.
Uniformed service members include those in the military, the NOAA, or Public Health Service, Foreign Service personnel, Peace Corps, or employees of the DOD, intelligence elements of military branches, FBI, Department of Treasury, Department of Energy, certain elements of the Department of State or Homeland Security, among other government employees.
Disabled citizens may qualify for an exemption after living in the home for only one of the five years before the sale.
Another possible exemption is based on your yearly income. If you have an annual income of less than $40,400 if single or $80,800 if married, or a qualifying widow or widower, you will pay 0% in capital gains tax. As long as you hold onto the property for more than one year.
While a 1031 exchange is not technically an exemption, it is a way to avoid paying capital gains tax, at least in the short term. An exchange does not remove the taxes you will have to pay on the property, but it will defer them by using the capital gained in the sale to invest in another property.
This method has some rules and complications, so it’s important to learn all of them before jumping into an exchange. First, the replacement property should be of equal or greater value to the one being sold. The replacement property must also be identified within 45 days of the sale and must be purchased within 180 days.
You must also watch out for cash payments which, if accepted before the exchange is complete, may disqualify the entire transaction and make all gains immediately taxable. It’s also worth noting that if you do a 1031 exchange, you will not be able to qualify for an exemption if you tried to sell the property within 5 years of the exchange.
How to Report Your Home Sale in Texas for Capital Gains Taxes
Even if you qualify for an exemption from the federal capital gains tax, you should still file a report to the IRS to report the sale of the home. Since Texas has no capital gains tax, there is no separate form to file for state taxes. Only forms for the federal capital gains tax are necessary.
If any of them are true, you must report your gains to the federal government:
- You have a taxable gain on your home sale and don’t qualify to exclude the gain.
- You wish to report your gain as taxable even though some or all are eligible for exclusion. (This is a good idea if you plan to sell another main home within the next two years and will receive a larger gain from the sale of that property.)
- You received Form 1099-S, even if you received no taxable gain.
If any are true, you must complete Form 8949 and then a Schedule D (Form 1040). Using the information on Form 8949, report the gain on your home as a capital gain on Schedule D. Depending on the amount of taxable gain you have from the sale of your home, you may have to increase your withholding or make estimated tax payments.
What About Selling a Texas Home You Inherited?
Texas has no inheritance tax or estate tax. An inheritance tax is levied on the heirs of the deceased (similar to income tax), while an estate tax is levied on the estate. Texas also has no state capital gains tax. If you inherit a home, you do not need to worry about paying state taxes on the property, even when you sell it.
While the federal government has an estate tax, it does not consider inheritances income for tax purposes, whether it’s investments, property, or cash. Once sold, you will only have to pay federal capital gains tax on the increase in value after you inherit it.
This means that if your parents purchased a home for $250,000, and you inherit it at a value of $600,000 and sell it for $650,000, you only pay capital gains taxes on the $50,000 difference between the last two unless otherwise exempt.
Here are the answers to some common questions about completing a Texas taxing you when selling a residence.
You will pay federal capital gains tax. Texas has no capital gains tax.
Texas has no capital gains tax, but if you lose money, there is no capital gain, so there is no tax.
If you lived in your home for two of the past five years, you may be eligible to claim your capital gains tax on your tax return, essentially avoiding paying.
Texas has no capital gains tax, so you would only pay a federal capital gains tax. There is no age limit to federal capital gains tax.
This is known as a 1031 exchange. It does not eliminate taxes but defers them to whenever you sell the property that the capital gain is reinvested into.