Capital Gains Tax When Selling Properties In Texas: What You Need To Know

When selling a home, we want to pocket as much profit as possible. But the more you profit from the sale, the more you may be liable to pay taxes on those earnings. This is where the capital gains tax comes in.

Read the answers for the frequently asked questions on this topic below for all you need to know about the capital gains tax when selling real estate in Texas.

Key points from this article:

Disclaimer – The information on this page is intended for general informational purposes only and not to provide legal or financial advice.

What is capital gains tax?

When you sell an investment or asset and make a profit, capital gains tax is the tax owed on that profit. Real estate is a taxable asset, so any gains from a home sale must be reported on your tax return for the year the property was sold.

Capital gains tax is calculated by subtracting the asset’s original cost or purchase price, plus any expenses incurred, from its final selling price.

Do you have to pay capital gains tax when selling a house in Texas?

Yes and no. Texas has no capital gains tax because it is a no income tax state. But home sellers are subject to federal capital gains tax, if applicable.

There is a primary residence exemption for capital gains tax. This means sellers are only liable when selling their primary residence if they made a profit of more than $250,000 (if filing as a single) or $500,000 (if married filing jointly).

How much is capital gains tax in real estate?

The federal tax rates for capital gains differ based on whether the profits from the real estate sale are considered a long-term or short-term capital gain and also depend on the seller’s income bracket.

Short-term capital gains are profits earned from selling an asset you had for less than one year and are taxed as ordinary income.

Long-term capital gains are profits from selling an asset you had for over a year. Depending on your income tax bracket, they are typically taxed at 15% or 20%.

The main difference between short-term and long-term capital gains tax in Texas is that short-term gains are usually taxed at a higher rate. In other words, if you sell your property within a year after purchasing it, your capital gains tax burden would be higher.

The tax rates for long-term capital gains are generally lower than for short-term capital gains, ranging from 0% to 20% depending on your taxable income.

Can you avoid capital gains taxes on a home sale?

Yes, there are exemptions and strategies that can reduce or eliminate your capital gains tax liability in Texas, and the primary residence exemption is the most common.

There are also capital gains tax income-based exemptions. In Texas, sellers whose annual taxable income falls into the current 0% capital gains tax income bracket are exempt. You can check the current income thresholds and requirements on the IRS website to help determine your potential capital gains tax liability or exemptions you may be eligible for.

What is the primary residence exemption for capital gains tax in Texas?

When selling a homestead property in Texas, you may qualify for the primary residence exemption, in which you would not have to pay capital gains taxes. To be eligible for this exemption, you must meet the following criteria:

• The property must have been your primary residence for at least two years (consecutive or not).
• You must have resided in the home for more than two years over the last five years (consecutive or not).
• You cannot have claimed an exemption on another property within the last two years.

If you meet those requirements, you can make a home sale profit of up to $250,000 (if single) or up to $500,000 (if married and filing jointly), and you will be exempt from paying capital gains tax.

Is there a way to avoid capital gains taxes when flipping houses?

When flipping houses, you can take advantage of a Section 1031 exchange, which allows you to defer capital gains taxes on the sale of an investment property so you can reinvest those proceeds into another property without an immediate tax burden.

A Section 1031 exchange permits capital gains taxes to be deferred when another “like-kind” property is purchased. Real estate investors and home flippers typically use this exchange.

To qualify for a 1031 exchange, the property sold must be of a “like-kind” to the one you are purchasing next with the proceeds from the current sale, and the exchange must be completed within 180 days of the original property sale.

Do you have to pay capital gains taxes when selling an inherited home?

When you sell an inherited property in Texas, you may be subject to the federal capital gains tax, which is paid on the profit made from the sale.

To calculate the capital gains tax on an inherited property, you’ll need to determine the net capital gains, which is the difference between the property’s stepped-up cost basis (home’s value on the day it was inherited) and its selling price.

The same tax rates apply based on whether it is a short-term or long-term capital gain (if you sold the property less than or more than one year after inheriting it), your income tax bracket, and filing status.

The stepped-up cost basis resets the property’s price to its value on the day it was inherited, as opposed to the purchase price paid by the deceased owner. That means that if the property is sold immediately after it was inherited, no capital gains tax is owed, as there is no time for the property’s value to appreciate.

Are there any tax implications for selling an inherited house?

The only tax implication for selling an inherited house in Texas is the potential liability for capital gains tax, as described above.

How do you report and file capital gains on Texas property sales?

The federal tax forms used to report capital gains tax on Texas property sales are Form 8949, with Part I and Part II differentiating short-term capital gains and losses from long-term capital gains and losses, and Schedule D (Form 1040), which is used to summarize the information from Form 8949 and calculate your total capital gains tax liability.

If you have any questions on how to complete these forms or need guidance regarding your specific tax situation, it is always best to consult with a tax professional.

How much capital gains tax do you pay when selling a rental property in Texas?

The federal capital gains tax rate for selling a rental property in Texas is the same rate that applies to selling other property types and is based on whether it is a long-term or short-term capital gain, your income tax bracket, and filing status.

The only difference is that when you sell a rental property, it does not qualify for the capital gains tax primary residence exemption.

When do you pay capital gains taxes on a property sale?

You are required to pay capital gains taxes when filing your tax return for the same tax year in which the property sale took place.

Do you have to pay capital gains taxes on a property immediately?

No, your capital gains taxes are due in full in the subsequent year’s tax return. For example, if you sell a property at any time in 2024, any capital gains taxes you are liable for are due when you file your 2024 tax return in the spring of 2025.

Do other states require you to pay additional capital gains taxes when selling a house?

Yes, there are states which have significantly higher rates for capital gains taxes when selling real estate. The states with the highest rates are California (13.3%), Oregon (9.5%), New Jersey (10.75%), Washington D.C. (10.75%) and Minnesota (9.85%).

Texas and other states like Florida do not impose a capital gains tax at the state level, making these states desirable for property investors and house flippers.