Capital Gains Tax on Texas Home Sales: How Much You Really Owe in 2026

Capital Gains Tax on Texas Home Sales: How Much You Really Owe in 2026

What Does "No State Income Tax" Actually Mean When You Sell a Texas Home?

Texas sellers often celebrate the absence of a state income tax, and they are right to do so. But the federal government still collects capital gains tax on home sale profits, and the rules are specific enough that a single mistake in calculating your basis, applying the Section 121 exclusion, or handling depreciation recapture can cost you thousands. This guide explains every layer of federal capital gains tax that applies to Texas home sales in 2026, from the primary-residence exclusion to the 3.8% Net Investment Income Tax surcharge.

TL;DR / Quick Answer: Most Texas homeowners who lived in their home for at least two of the last five years can exclude up to $250,000 in profit (single filer) or $500,000 (married filing jointly) from federal capital gains tax. Texas charges zero state capital gains tax. If your profit exceeds the exclusion, the taxable portion is subject to 0%, 15%, or 20% federal long-term capital gains rates depending on your income, plus a potential 3.8% NIIT surcharge for high earners. Rental property sellers also face a 25% tax on depreciation recapture before any remaining gain is taxed at capital gains rates.

The Section 121 Primary-Residence Exclusion: Your Biggest Tax Shield

IRS Publication 523 and IRC Section 121 together provide the most powerful tax break available to Texas home sellers. Under these rules, a qualifying homeowner can exclude up to $250,000 of capital gain from taxable income. A married couple filing jointly can exclude up to $500,000.

To qualify, you must pass two tests, both measured over the five-year period ending on the date of sale:

• Ownership test: You owned the property for at least 24 months (two years) out of the last five years.
• Use test: You used the property as your primary residence for at least 24 months out of the last five years.

The two-year periods do not need to overlap or run concurrently. You could have owned the home for two years without living in it, then moved in; as long as both tests are satisfied within the five-year window, you qualify. Additionally, you generally cannot claim the exclusion if you used it on another home sale within the previous two years.

One important nuance for married couples: to claim the full $500,000 joint exclusion, at least one spouse must satisfy the ownership test, and both spouses must independently satisfy the use test. If only one spouse passes the use test, the couple is limited to a $250,000 exclusion.

Partial exclusions are available if you fail the two-year tests due to a job relocation, health issue, or other IRS-recognized unforeseen circumstance. The exclusion is prorated based on the portion of the required 24 months you actually satisfied.

How the IRS Calculates Your Cost Basis (And Why Getting It Right Matters)

Your taxable capital gain is not simply sale price minus purchase price. The IRS uses your adjusted basis, which can be significantly higher than what you originally paid. A higher adjusted basis means less taxable gain.

Your adjusted basis starts with the original purchase price (what you paid plus closing costs at purchase, including title insurance, attorney fees, recording fees, and transfer taxes). From there, you add the cost of capital improvements made during ownership. Capital improvements are permanent additions or alterations that increase the property's value, adapt it to new uses, or extend its useful life. Common examples include:

• Adding a room, deck, or garage
• Replacing the roof or HVAC system
• Installing a new driveway, fence, or built-in appliance
• Landscaping improvements that add permanent value

Routine repairs and maintenance (painting, fixing a leaky faucet, replacing broken windows) do not increase your basis, per IRS Publication 523.

Example cost basis calculation: - Original purchase price: $320,000 - Closing costs at purchase: $8,500 - Kitchen remodel (2022): $45,000 - New roof (2023): $18,000 - Adjusted basis: $391,500

Keeping receipts and permits for every capital improvement is essential. The IRS may audit basis claims, especially on high-gain transactions.

2026 Federal Capital Gains Tax Rates: The Three Tiers

Once you know your taxable gain (sale price minus selling costs minus adjusted basis minus any applicable exclusion), it is taxed at federal long-term or short-term capital gains rates. Per Bankrate's 2026 capital gains rate guide, the rates for property held more than one year are:

These thresholds apply to total taxable income, not just the capital gain itself. If a married couple has $150,000 in ordinary income (wages, retirement distributions, etc.) plus a $60,000 taxable capital gain, the capital gain is stacked on top of the ordinary income for rate-bracket purposes.

Short-term capital gains (property held one year or less) are taxed at ordinary income rates: 10%, 12%, 22%, 24%, 32%, 35%, or 37% in 2026, depending on your total taxable income. For a home flipper in a high income bracket, this difference is dramatic. A $100,000 gain taxed at 37% costs $37,000; the same gain taxed at 15% costs $15,000.

The NIIT: The 3.8% Surcharge High-Earning Sellers Often Miss

The Net Investment Income Tax (NIIT) adds 3.8% on top of federal capital gains rates for taxpayers whose Modified Adjusted Gross Income (MAGI) exceeds these thresholds:

• Married filing jointly: $250,000 MAGI
• Single or head of household: $200,000 MAGI
• Married filing separately: $125,000 MAGI

The NIIT applies to the lesser of (a) net investment income or (b) the amount by which your MAGI exceeds the threshold. Critically, gain excluded under Section 121 is also excluded from NIIT calculations. So if a couple's entire $190,000 gain is covered by the $500,000 exclusion, none of it triggers NIIT.

However, gain that exceeds the exclusion and pushes a couple's MAGI above $250,000 can face the full 3.8% surcharge. At the 15% long-term capital gains rate plus 3.8% NIIT, the effective rate becomes 18.8%. At the 20% rate, it reaches 23.8%. Texas's $0 state capital gains tax is a meaningful advantage here compared to California sellers facing an additional 13.3% state rate.

Depreciation Recapture on Rental Properties: The 25% Rule

Texas investors who have been renting a property and then sell it face an additional tax calculation that surprises many: depreciation recapture. Under IRC Section 1250, the depreciation deductions you claimed (or were allowed to claim) during the rental period are "recaptured" and taxed at up to 25%, not at the lower capital gains rate.

Here is how it works:

1. Your adjusted basis for a rental is the original purchase price plus improvements minus accumulated depreciation taken.
2. When you sell, the IRS separates the total gain into two pieces: the portion attributable to depreciation (taxed at 25%) and any remaining gain above depreciation (taxed at long-term capital gains rates of 0%, 15%, or 20%).
3. Depreciation recapture is reported on Form 4797 and Schedule D.

A residential rental property is depreciated over 27.5 years using the straight-line method. On a $275,000 building (excluding land value), that is $10,000 per year. After 10 years, accumulated depreciation is $100,000, and that $100,000 is recaptured at 25% ($25,000 in tax) regardless of the seller's income bracket.

Worked Example B: Houston Investor with Depreciation Recapture

A Houston investor purchased a rental property in 2015 for $280,000 (land value $50,000; building value $230,000). Over 10 years, accumulated straight-line depreciation is $83,636 ($230,000 / 27.5 years x 10 years). The investor sells for $430,000 in 2026, with $15,000 in selling costs.

• Net sale price: $415,000
• Adjusted basis: $280,000 + $20,000 improvements - $83,636 depreciation = $216,364
• Total gain: $415,000 - $216,364 = $198,636
• Depreciation recapture (taxed at 25%): $83,636 x 25% = $20,909
• Remaining long-term capital gain: $198,636 - $83,636 = $115,000
• If investor's income puts them in the 15% bracket: $115,000 x 15% = $17,250
• Total federal tax before NIIT: approximately $38,159

If this investor's MAGI exceeds $200,000 (single) or $250,000 (married), the NIIT adds another 3.8% on the $198,636 gain (which is investment income, not a primary-residence exclusion), adding roughly $7,548.

The 1031 exchange, discussed in the next section, is the primary tool for deferring both depreciation recapture and capital gains taxes.

1031 Exchange Basics: Defer Capital Gains on Investment Property

Under IRC Section 1031, investors who sell one investment or business property and reinvest the proceeds into a "like-kind" replacement property can defer capital gains taxes indefinitely. The rules are strict:

• 45-day identification window: You have exactly 45 days from the date you close on the relinquished (sold) property to identify in writing up to three potential replacement properties. The written identification must be delivered to the qualified intermediary or seller of the replacement property. Notifying your own attorney or agent does not count.
• 180-day closing window: The replacement property must be closed and acquired within 180 days of selling the relinquished property (or by your tax filing deadline with extensions, whichever comes first).
• A qualified intermediary (QI) must hold the sale proceeds; if you receive the money directly, the exchange is disqualified.
• Replacement property must be of equal or greater value to defer 100% of the gain. Any shortfall (called "boot") is taxed immediately.

The 1031 exchange does not eliminate taxes; it defers them. The deferred gain carries into the new property's basis. But for investors building a portfolio over decades, deferral can be enormously valuable. Per IPX 1031, if you sell after October 16, you must file a tax extension by April 15 to preserve the full 180-day exchange window.

Worked Example A: Spring TX Couple Selling Primary Residence

Carlos and Maria bought a home in Spring, TX in February 2019 for $320,000. Their closing costs at purchase were $9,200 (adding to basis). In 2021 they added a covered patio and outdoor kitchen for $22,000. In 2023 they replaced the HVAC system for $11,500.

They sell in June 2026 for $510,000 with $28,000 in total selling costs (agent commissions, title, etc.).

Adjusted basis: - Purchase price: $320,000 - Closing costs at purchase: $9,200 - Patio/outdoor kitchen: $22,000 - HVAC replacement: $11,500 - Adjusted basis total: $362,700

Gain calculation: - Net sale price: $510,000 - $28,000 selling costs = $482,000 - Gain: $482,000 - $362,700 = $119,300

Section 121 exclusion: Carlos and Maria have owned and lived in the home since February 2019, more than two of the last five years. They qualify for the full $500,000 married filing jointly exclusion.

$119,300 gain is fully excluded. Federal capital gains tax owed: $0.

Texas charges no state income or capital gains tax, so their total capital gains tax bill from this sale is $0. Their $190,000 in gross profit ($510,000 - $320,000 purchase) is tax-free because of the Section 121 exclusion and their capital improvement additions to basis.

What Texas Charges (Spoiler: Nothing)

Texas is one of nine states with no state income tax, which means there is no state-level capital gains tax. Unlike California (up to 13.3% state capital gains rate), New York (up to 10.9%), or Oregon (9.9%), Texas sellers pay only federal taxes on home sale gains.

This is one of the most significant financial advantages of homeownership in Texas. A California homeowner in the top bracket selling a home with $300,000 in taxable gain after the exclusion could owe over $39,900 in state capital gains tax alone. A Texas homeowner in the same situation owes $0 to the state. The IRS still collects its share, but the absence of a state bite makes a meaningful difference in net proceeds.

For current Texas real estate tax guidance, also see our guide to the Texas homestead exemption, which covers how to reduce your annual property tax bill while you own your home, and our Texas title insurance overview explaining what to expect at closing.

Inherited Texas Homes: The Step-Up Basis Advantage Under Section 1014

Inheriting a home in Texas carries one of the most valuable tax benefits in the federal code. Under IRC Section 1014, the cost basis of inherited property is "stepped up" to its fair market value (FMV) on the date of the decedent's death, regardless of what the original owner paid decades ago.

If your parent bought a Houston home for $80,000 in 1985 and it was worth $450,000 when they died in 2025, your basis is $450,000, not $80,000. If you sell promptly at $450,000, your taxable gain is $0.

Texas has an additional advantage: as a community property state, when one spouse dies, the entire property (both halves) receives a full step-up in basis, not just the deceased spouse's half. This is a significant advantage over common-law property states, where only the decedent's 50% share steps up.

Key points for heirs:

• Get a professional date-of-death appraisal from a licensed real estate appraiser. The IRS requires documentation; a Zestimate is not sufficient.
• If you move into the inherited home and use it as your primary residence for at least two of the next five years, you can also qualify for the Section 121 exclusion on top of the stepped-up basis.
• Texas has no state inheritance tax. The federal estate tax applies only to estates exceeding approximately $15 million in 2026.

The Texas Transfer on Death Deed (TODD) also conveys stepped-up basis treatment, so heirs who receive property via TODD get the same benefit as those who inherit through a will.

Divorce and Capital Gains: What Texas Sellers Need to Know

Texas divorce proceedings frequently involve selling the family home. A few rules apply:

• Property transfer between spouses incident to divorce is not a taxable event. If one spouse receives the home in a settlement, they take over the other spouse's original basis and holding period. There is no taxable gain at the time of transfer.
• Each spouse can use their own $250,000 exclusion if they later sell and meet the two-year ownership and use tests individually.
• The joint $500,000 exclusion applies if the couple sells the home while still married and both spouses meet the use test. Even if only one spouse lived in the home, the couple can still claim $250,000 (based on the qualifying spouse alone).
• If one spouse occupied the home under a divorce or separation agreement and the other spouse owned it under a written instrument, the occupying spouse's use can count for both the ownership and use tests for exclusion purposes.

For Texas community property situations, the departing spouse's portion of a jointly owned home carries their original half-basis, not a stepped-up amount, unless the transfer itself triggers a buyout at market value (in which case that value becomes the new owner's basis for that portion). Consulting a Texas family law attorney and a CPA before finalizing any divorce settlement involving real estate is essential.

For more on what to expect at closing after a sale, review our Texas home inspection checklist and our guide to title insurance in Texas.

2026 Capital Gains Rate Summary Table

Frequently Asked Questions

Does Texas have a capital gains tax on home sales?

No. Texas has no state income tax and no state capital gains tax. All capital gains tax on a Texas home sale is federal only. This is a significant advantage over high-income-tax states; a Texas seller pays nothing to the state on any home sale gain, while a California seller in the top bracket could owe over 13% of the gain to California alone.

Can I exclude gain if I only lived in my Texas home for 18 months?

Not the full $250,000 or $500,000 exclusion, but you may qualify for a partial exclusion if you sold because of a qualifying unforeseen circumstance recognized by the IRS. These include job relocation (more than 50 miles from your prior home), serious illness, divorce, death of a co-owner, or a multiple birth. The partial exclusion is proportional: 18 months qualifies you for 75% of the full exclusion (18/24 = 75%). A single filer could exclude up to $187,500 of gain rather than $250,000.

What counts as a capital improvement versus a repair for cost basis purposes?

Capital improvements add to your basis and reduce future taxable gain. They include room additions, new roofing, HVAC replacement, major kitchen or bath remodels, installing a pool or fence, and adding a driveway. Routine maintenance and repairs (painting walls, fixing a broken toilet, replacing a broken window pane) do not increase your basis. Per IRS Publication 523, the distinction turns on whether the work adds value, adapts the property to a new use, or substantially extends its useful life.

What happens if I sold a rental property and forgot to claim depreciation?

The IRS taxes unrecaptured Section 1250 gain on the depreciation you were "allowed or allowable," meaning even if you never actually claimed the depreciation deduction, the recapture tax still applies to the amount you could have claimed. If you discover you failed to take depreciation on a rental, you can file Form 3115 (Application for Change in Accounting Method) to claim the missed deductions in the current year and also adjust your basis correctly before a sale.

How does the 1031 exchange interact with the Section 121 exclusion?

These two rules operate independently. Section 121 applies to primary residences; Section 1031 applies to investment or business property. You cannot use a 1031 exchange on a home that qualifies for the Section 121 exclusion (you can just sell it tax-free under Sec. 121). However, if you previously used a primary residence as a rental, a portion of the gain may be subject to depreciation recapture even if you later requalify for the primary-residence exclusion. In that scenario, the recapture portion is not sheltered by Section 121, per IRS rules on the sale of a residence.

If I am married filing separately, does each spouse get a $250,000 exclusion on the same house?

No. When filing separately on the sale of the same home, only the spouse who meets both the ownership and use tests can claim an exclusion, limited to $250,000 per eligible spouse. Both spouses cannot each claim $250,000 on one home sale if filing separately on that same property, unless each independently meets all the requirements and each owned their separate share of the property. In most situations, filing jointly and claiming the full $500,000 exclusion is more advantageous.

Talk to a Texas Seller's Agent Who Understands the Tax Picture

Calculating your capital gains tax exposure before listing your home is one of the smartest moves a Texas seller can make. Knowing your adjusted basis, running the numbers on the Section 121 exclusion, and understanding whether a 1031 exchange makes sense for an investment property are all decisions that directly affect your net proceeds at closing.

Erick Harbert at The Harbert Real Estate Group at Realty Right works with Texas sellers across the Houston metro area to help them understand the financial picture before, during, and after a sale. Erick and his team can connect you with experienced CPAs and tax attorneys for complex situations while handling every aspect of your listing strategy.

Reach out directly:

• Phone: (281) 305-2520
• Email: [email protected]
• Office: 6605 Cypresswood Dr Ste 300, Spring TX 77379
• Web: harbertgroup.com

This article provides general educational information about federal and Texas tax rules. It is not legal or tax advice. Consult a licensed CPA or tax attorney for guidance specific to your situation.