Capital Gains Tax When Selling a House in Texas: What You Actually Owe
Texas has no state income tax but you still owe federal capital gains. Here's how the $250K exclusion works and when you'll owe taxes on a home sale.
Texas has no state income tax — but you still owe federal capital gains tax on profit from a home sale unless you qualify for the primary residence exclusion. Here's exactly how it works.
The Primary Residence Exclusion
Under IRS Section 121, you can exclude up to $250,000 of capital gains (single filer) or $500,000 (married filing jointly) from a primary residence sale. To qualify: you must have owned the home for at least 2 years AND lived in it as your primary residence for at least 2 of the last 5 years.
How Capital Gains Are Calculated
Capital gain = Sale Price − Adjusted Basis. Your adjusted basis is what you paid for the home plus capital improvements (not repairs) minus depreciation if you ever rented it. Selling costs (agent commissions, closing costs) reduce your gain. Keep all records of major improvements.
Long-Term vs. Short-Term Rates
If you owned the home for more than 1 year: long-term capital gains rates of 0%, 15%, or 20% depending on your income. If under 1 year: short-term rates equal to your ordinary income tax rate (up to 37%). Holding a home at least 366 days before selling saves significant money for most sellers.
When You Will Owe Taxes
You'll owe capital gains tax if: your gain exceeds the exclusion ($250K/$500K), you don't meet the ownership/use requirements, it's a rental property (no exclusion), or you've used the exclusion on another home in the last 2 years.
The Net Investment Income Tax
High earners (MAGI over $200K single / $250K married) owe an additional 3.8% Net Investment Income Tax on investment gains. This doesn't apply to gains excluded under Section 121 — but does apply to the portion exceeding the exclusion.
Partial Exclusion Rules
If you lived in the home less than 2 years but sold due to a job change, health issue, or unforeseen circumstances, you may qualify for a partial exclusion equal to the fraction of the 2-year requirement you met. A CPA can calculate this for your specific situation.
Frequently Asked Questions
Official Resources & Further Reading
- IRS Publication 523 — Selling Your Home — Internal Revenue Service
- IRS — Sale of Residence Tax Tips — Internal Revenue Service
- TX Comptroller — No State Income Tax — Texas Comptroller of Public Accounts
Related reading: Texas seller closing costs · selling a rental property in Texas · 1031 exchange in Texas
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