How Much Is Capital Gains Tax in Texas for Real Estate?

Capital gains tax on real estate in Texas is entirely a federal matter. Texas has no state income tax, so there is no state-level capital gains tax when you sell a house, a rental, or land. Your bill goes to the IRS, and for property held longer than a year, the federal rate lands somewhere between 0% and 23.8% depending on your total income and whether the property was your home or an investment.

Short-Term Versus Long-Term Rates

How long you owned the property before selling changes the tax dramatically. Own it a year or less and the profit is a short-term capital gain, taxed as ordinary income at rates that climb from 10% to 37% in 2026.¹² A quick flip can eat up a third or more of the profit.

Hold the property more than a year and you get the preferential long-term rates: 0%, 15%, or 20%.

2026 Long-Term Capital Gains Brackets

Which of the three long-term rates applies depends on your total taxable income for the year, with the gain stacked on top of your other income. For 2026:²

0% rate: taxable income up to $49,450 single, $98,900 married filing jointly, $66,200 head of household.
15% rate: taxable income between those floors and $545,500 single, $613,700 joint, $579,600 head of household.
20% rate: taxable income above the 15% ceiling for each filing status.

A married couple with $150,000 of combined taxable income would pay 0% on the slice of gain that still fits inside the 0% bracket and 15% on whatever spills over. Even if your wages alone fall in the 0% zone, a sizable real estate gain can push part of the profit into 15% or 20%.

The 3.8% Net Investment Income Tax

Higher earners owe an extra 3.8% federal surtax, the Net Investment Income Tax, on capital gains and other investment earnings.³ It kicks in when modified adjusted gross income exceeds $200,000 for single filers and heads of household, or $250,000 for married couples filing jointly. Those thresholds are not indexed for inflation and have not moved since 2013. The 3.8% applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold. Combined with the top 20% long-term rate, this pushes the maximum federal rate on a real estate gain to 23.8%.

Figuring Out What Portion of the Sale Is Actually Taxable

You don’t pay tax on the full sale price, only on the profit. That profit is the sale price, minus selling expenses like agent commissions, title fees, and transfer costs, minus your adjusted basis in the property.

Your adjusted basis starts with what you paid, including the closing costs from your original purchase. It goes up for capital improvements: a new roof, a kitchen remodel, an added room. Routine repairs and maintenance don’t count. If the property was ever rented out, your basis gets reduced by any depreciation you claimed or should have claimed, which increases the taxable gain when you sell.

If the number comes out negative, you have a capital loss. Losses on a personal residence are not deductible, but losses on investment property can offset other capital gains and up to $3,000 of ordinary income per year, with the rest carried forward.

The Primary Residence Exclusion Wipes Out Most Home Sale Taxes

The single biggest tax break for Texas homeowners is the Section 121 exclusion. It removes up to $250,000 of capital gain from federal tax if you’re single, or up to $500,000 if you’re married filing jointly.⁴ For most Texas homeowners, this alone eliminates the federal bill.

To qualify, look at the five years ending on the sale date. You must have owned the home for at least two of those five years, and you must have used it as your main home for at least two of those five years. The two years don’t have to be consecutive. For the full $500,000 married exclusion, only one spouse needs to satisfy the ownership test, but both must satisfy the use test, and you must file jointly for the sale year.

Any gain above the exclusion amount is taxed at the regular long-term rates.

Partial Exclusion When You Sell Early

Sell before hitting the full two years and you may still get a prorated exclusion if the sale was triggered by a job move, a health issue, or an unforeseeable event. The IRS reads unforeseeable events broadly: death, divorce, job loss, inability to pay basic living expenses, natural disaster, and multiple births from the same pregnancy are all listed examples.⁵

The exclusion is prorated by how much of the 24 months you completed. Fifteen months of use before a qualifying job transfer, for example, lets a single filer exclude roughly $156,250 (15/24 of $250,000).

Divorce and Surviving Spouse Rules

A home received in a divorce carries over the former spouse’s ownership time toward your two-year test, and time your ex spends living there under a divorce or separation agreement counts toward your use test.⁴ A surviving spouse can claim the full $500,000 exclusion if they sell within two years of the death, provided the couple would have qualified immediately before. After that window, the exclusion drops to the $250,000 single amount.

Depreciation Recapture on Rental and Investment Property

If the property was a rental, you face a layer of tax the exclusion doesn’t apply to. Depreciation deductions you claimed (or were required to claim) during ownership get “recaptured” when you sell. The portion of your gain equal to that total depreciation is taxed at up to 25%, regardless of your income bracket.⁶

A quick example. You bought a rental for $300,000, claimed $50,000 of depreciation over the years, and sell for $400,000. Your adjusted basis is $250,000 and your gain is $150,000. The first $50,000 (the recaptured depreciation) is taxed at up to 25%. The remaining $100,000 is taxed at your regular long-term rate of 0%, 15%, or 20%. Many first-time investment property sellers are blindsided by this, because the deductions that lowered their taxes each rental year come back at a higher rate on sale.

Deferring the Tax With a 1031 Exchange

Investment property sellers can defer the entire capital gains tax by rolling the proceeds into another investment property through a like-kind exchange under Section 1031. The absence of a Texas state tax layer makes the mechanics cleaner here than in most other states.

The rules are strict. A 1031 exchange is only for property held for investment or business use. A primary residence doesn’t qualify, and neither does property you bought to flip.⁷ The replacement must also be real estate, though “like-kind” is read broadly: a rental house can be swapped for an office building or vacant land.⁸ U.S. real estate cannot be exchanged for foreign real estate.

Two deadlines run from the day you close on the sale, and missing either one kills the exchange. You have 45 calendar days to identify potential replacement properties in writing, and 180 calendar days to close on one or more of them. Weekends and holidays count. If your tax return is due before day 180, the exchange window closes on your filing deadline unless you file an extension.

You cannot touch the money in between. A qualified intermediary, an independent third party, must hold the funds. Your agent, attorney, accountant, or anyone who has served you in those roles within the past two years is disqualified from acting as intermediary.⁹

Inherited Property Gets a Stepped-Up Basis

Inherited real estate is taxed differently from property you bought. Federal law resets the tax basis to the fair market value on the date the previous owner died.¹⁰ Any appreciation during the decedent’s lifetime disappears for tax purposes.

Say your parents bought a Houston house for $80,000 in 1985 and it was worth $450,000 when they died. Your basis is $450,000, not $80,000. Sell for $470,000 and your taxable gain is $20,000. Sell right away at the same value and you may owe nothing.

The step-up applies whether the property passes by will, by trust, or under Texas intestacy. It does not apply to property gifted during the owner’s lifetime, which keeps the original owner’s basis. Timing of family transfers matters.

Estimated Tax Payments After the Sale

A real estate sale can produce a tax bill that regular paycheck withholding won’t cover. If you expect to owe $1,000 or more in federal tax for the year after withholding and credits, the IRS wants quarterly estimated payments, and underpayment triggers a penalty.¹¹

The 2026 quarterly deadlines:¹²

First quarter: April 15, 2026
Second quarter: June 15, 2026
Third quarter: September 15, 2026
Fourth quarter: January 15, 2027

You avoid the penalty by paying at least 90% of the current year’s tax or 100% of last year’s (110% if your prior-year AGI was over $150,000). The safer move after a midyear closing is to make the estimated payment in the quarter the sale settles rather than waiting until the following spring.

Texas-Specific Costs to Know About

Because Texas has no state income tax, there’s no state return or state gain to calculate after a sale. Closing itself still costs money: prorated property taxes for the days you owned the home in the sale year, county recording fees, title insurance premiums, escrow fees, and appraisal charges. These closing costs count as selling expenses, which reduce your taxable gain, so keep the settlement statement.

Franchise Tax on Entity-Owned Property

If the property is owned by an LLC, corporation, or partnership rather than by you personally, the Texas franchise tax may come into play. It’s a tax on the entity’s revenue minus certain deductions, not an income tax.¹³ For reports due on or after January 1, 2026, entities with annualized total revenue of $2,650,000 or less owe nothing.¹⁴ Above that, the rate is 0.75% of taxable margin for most entities and 0.375% for wholesalers and retailers. A large property sale can push an entity over the no-tax-due threshold, so business owners selling valuable real estate should check whether the transaction creates a franchise tax bill.

1
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
Internal Revenue Service. Net Investment Income Tax
4
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
5
Internal Revenue Service. Publication 523 (2025), Selling Your Home
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Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets
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Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
8
Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
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Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
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Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
11
Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
12
Internal Revenue Service. Estimated Tax
13
State of Texas. Tax Code Chapter 171 – Franchise Tax
14
Texas Comptroller. 2026 Franchise Tax Instructions