Capital Gains Tax on Property in Texas

No. Texas is one of nine states with no state income tax, which means there is no state-level capital gains tax either. When you sell a home, rental property, or any real estate in Texas, you do not owe the state of Texas a single dollar on your profit.

This is a significant advantage compared to states like California (up to 13.3%), New York (up to 10.9%), or New Jersey (up to 10.75%), where state capital gains taxes can add tens of thousands of dollars to your tax bill on a property sale.

However, federal capital gains tax still applies. The IRS taxes your profit on the sale of real estate regardless of which state you live in. This is the tax most Texas homeowners need to plan for.

The distinction matters because many homeowners in Dallas-Fort Worth assume they owe nothing when they sell. While you will not write a check to the state, you may owe a substantial amount to the federal government depending on your gain, your income, and how long you owned the property.

The rest of this guide focuses on the federal capital gains tax rules that apply to Texas homeowners, the exclusions that can eliminate your tax liability, and strategies to minimize what you owe.

Capital gains tax is a tax on the profit you make when you sell an asset for more than you paid for it. For real estate, your gain is calculated using a simple formula:

Your cost basis is not just your original purchase price. It includes:

• Purchase price — what you originally paid for the home
• Closing costs from purchase — title fees, transfer taxes, recording fees
• Capital improvements — renovations, additions, new roof, HVAC replacement (not routine maintenance or repairs)
• Selling costs — agent commissions, title insurance, transfer fees at closing

The higher your cost basis, the lower your taxable gain. This is why tracking every improvement you make to the property matters. For a full breakdown of what sellers pay at closing, see our guide on closing costs in Texas.

Short-Term vs. Long-Term Capital Gains

The IRS treats your gain differently depending on how long you owned the property:

2026 Long-Term Capital Gains Tax Rates

Thresholds are approximate for the 2026 tax year. Consult a tax professional for exact figures based on your filing status.

Net Investment Income Tax (NIIT)

High earners may also owe an additional 3.8% Net Investment Income Tax on capital gains. This surtax applies if your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). For a DFW homeowner with a large gain on an investment property, this can add a meaningful amount to the tax bill.

The single most powerful tax benefit available to homeowners selling their primary residence is the Section 121 exclusion. This IRS provision allows you to exclude a significant portion of your capital gains from federal taxes — often eliminating your tax liability entirely.

How Much Can You Exclude?

• Single filers: exclude up to $250,000 in capital gains
• Married filing jointly: exclude up to $500,000 in capital gains

For most Texas homeowners, this exclusion covers the entire gain. The median home price in Dallas-Fort Worth hovers around $350,000-$400,000, and many long-time homeowners originally purchased for significantly less — but the gain is still well within the exclusion limits.

Qualification Requirements

To qualify for the full exclusion, you must meet three conditions:

• Ownership test: you owned the home for at least 2 of the last 5 years before the sale
• Use test: you lived in the home as your primary residence for at least 2 of the last 5 years (the 2 years do not need to be consecutive)
• Timing test: you have not used the Section 121 exclusion on another home sale within the past 2 years

Partial Exclusion

If you do not meet the full 2-year requirement, you may still qualify for a partial exclusion if you sold due to:

• A change in employment or workplace location
• Health reasons
• Unforeseen circumstances (divorce, death of a spouse, job loss, natural disaster)

The partial exclusion is prorated based on the time you actually lived in the home. For example, if you lived in the home for 1 year out of the required 2, you could exclude up to 50% of the maximum amount ($125,000 for single filers or $250,000 for married filing jointly).

Example: DFW Homeowner Using the Section 121 Exclusion

The Section 121 exclusion does not apply to investment or rental properties. If you are selling a property that was never your primary residence, you will owe federal capital gains tax on the entire gain (minus your cost basis).

For landlords and investors in Dallas-Fort Worth, there are additional tax considerations beyond the basic capital gains calculation:

Depreciation Recapture

If you claimed depreciation deductions on a rental property (as most landlords do), the IRS requires you to "recapture" that depreciation when you sell. Depreciation recapture is taxed at a flat 25% rate, regardless of your income bracket.

For example, if you depreciated a rental property by $40,000 over the years you owned it, you would owe 25% on that $40,000 ($10,000) in addition to any capital gains tax on the remaining profit.

Your adjusted cost basis for a rental property is: purchase price + improvements − total depreciation taken. This lower basis means a larger taxable gain on the sale.

1031 Exchange: Tax-Deferred Exchange

A 1031 exchange (named after IRS Section 1031) allows you to defer capital gains tax by reinvesting the proceeds from the sale of an investment property into a "like-kind" replacement property. The rules are strict:

• You must identify replacement property within 45 days of closing
• You must close on the replacement within 180 days
• A qualified intermediary must hold the funds (you cannot touch the money)
• Both properties must be held for investment or business use (not personal use)
• The replacement property must be of equal or greater value to defer the entire gain

A 1031 exchange does not eliminate the tax — it defers it. When you eventually sell the replacement property without doing another exchange, you will owe tax on the accumulated gains. However, many investors chain 1031 exchanges throughout their career and ultimately pass the property to heirs, who receive a stepped-up basis.

If you are a DFW investor considering selling a rental property, a 1031 exchange is worth discussing with your CPA before you list. Some landlords who are tired of managing rentals prefer a clean sale instead — we work with tired landlords regularly to make that process as smooth as possible.

Even though Texas homeowners do not pay state capital gains tax, the federal bill can still be substantial. Here are the most effective strategies to reduce or eliminate your liability:

1. Use the Primary Residence Exclusion (Section 121)

This is the most straightforward way to avoid capital gains tax. If you meet the 2-out-of-5-year ownership and use requirements, you can exclude up to $250,000 (single) or $500,000 (married filing jointly). For most DFW homeowners, this covers the entire gain.

2. Increase Your Cost Basis by Tracking Improvements

Every capital improvement you make to your home increases your cost basis, which reduces your taxable gain. Keep receipts and records for:

• Kitchen and bathroom remodels
• Room additions, garage conversions, patio enclosures
• New roof, HVAC system, water heater, or windows
• Foundation repair, new fencing, landscaping hardscape
• New flooring, electrical upgrades, plumbing replacement

Note: routine maintenance (painting, fixing a leaky faucet, mowing) does not increase your cost basis. Only improvements that add value, extend the home's useful life, or adapt it to new uses count.

3. 1031 Exchange for Investment Properties

As discussed above, exchanging into another investment property defers the tax entirely. This is the most common strategy for DFW investors selling rental homes or multifamily properties.

4. Installment Sale

An installment sale allows you to spread the gain over multiple tax years by receiving payments over time instead of a lump sum. This can keep you in a lower tax bracket each year and reduce your overall tax liability. Installment sales are more common in owner-financed transactions.

5. Opportunity Zone Investments

If you reinvest capital gains into a Qualified Opportunity Zone Fund within 180 days of the sale, you can defer the gain. After holding the Opportunity Zone investment for at least 10 years, any additional gains on that investment are tax-free. Several areas in Dallas-Fort Worth are designated Opportunity Zones.

6. Offset Gains With Capital Losses

If you have capital losses from other investments (stocks, other real estate, business losses), you can use those losses to offset your capital gains from the property sale. This is called "tax-loss harvesting" and is best coordinated with your financial advisor or CPA.

7. Stepped-Up Basis for Inherited Property

If you inherited a property, your cost basis is "stepped up" to the fair market value at the date of the previous owner's death — not what they originally paid for it. This often eliminates most or all of the capital gains. For example, if a parent bought a home for $80,000 in 1995 and it was worth $300,000 at their passing, your cost basis is $300,000, not $80,000.

8. Time the Sale Strategically

If you have flexibility on when to sell, consider closing in a year when your income is lower. Since long-term capital gains rates depend on your overall taxable income, selling during a year of lower earnings (retirement, sabbatical, job transition) can push you into a lower bracket — or even the 0% rate if your total taxable income is low enough.

Here are four realistic scenarios to illustrate how capital gains tax works for DFW property owners:

These examples are simplified for illustration. Your actual tax liability depends on your complete tax situation. Always consult a qualified tax professional before making decisions about a property sale. If you want to understand your selling options before meeting with your CPA, compare your options here or learn about selling your Dallas home fast.