Does Texas Have Capital Gains Tax? What You Need to Know in 2024 (2024)

Understanding capital gains tax in Texas can save you a significant amount of money and help you make smarter investment decisions. In this comprehensive guide, we’ll cover everything from federal and state capital gains taxes, short-term and long-term gains, exemptions and strategies to minimize your tax liability, calculating capital gains tax on inherited property, and reporting requirements. Buckle up for an insightful journey into capital gains tax in Texas!

Texas Capital Gains Tax: Key Facts & Takeaways

• Texas does not impose a state capital gains tax, but individuals may be liable for federal taxes.
• Exemptions and strategies are available to reduce or eliminate one’s liability when selling property in Texas.
• Accurate recordkeeping is essential to comply with Texas state tax laws and calculate capital gains tax liabilities.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

Understanding Capital Gains Tax in Texas

Capital gains tax is a tax on any profit from the sale of a capital asset, otherwise known as a capital gain. Capital assets can include real estate, stocks, or other types of property.

There are eight states that do not impose state-level capital gains taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. (Since we're a real estate website, it's also worth noting that Washington's capital gains tax does not apply to selling or exchanging real estate.)

While Texas does not impose a state tax on capital gains, you still need to pay capital gains taxes at the federal level. This means that when selling land or property in Texas, you might be liable for federal capital gains taxes, although some exemptions and strategies exist to avoid or reduce capital gains tax.

Proposition 4, the Texas Income Tax Amendment, stipulates that a personal state income tax cannot be implemented without voter approval. Consequently, Texas has a competitive edge over other states with higher capital gains tax rates, such as California, Oregon, and Minnesota.

Federal vs. State Capital Gains Taxes

In Texas, there is no state capital gains tax, which means you will only be required to remit capital gains taxes to the federal government. The long-term capital gains tax rates are 0%, 15%, and 20%, depending on your income and the type of asset. (There are also a few exceptions, such as for collectibles, where the tax rate can be higher, but no higher than your ordinary income tax bracket.) Short-term capital gains, on the other hand, are taxed at the same rates as ordinary income.

The long-term capital gains tax brackets are adjusted annually, so be sure to check the current income limits to make the most accurate estimation of your tax liability.

Understanding the difference between federal capital gains taxes and state capital gains taxes is essential to make informed decisions when selling property in Texas.

How Texas Compares to Other States

While Texas does not impose a state-level capital gains tax, other states have significantly higher rates. California, Oregon, and Minnesota have some of the highest capital gains tax rates at 13.3%, 9.9%, and 9.85%, respectively. New Jersey and Washington, D.C., each have a rate of 10.75%, though New Jersey has some additional tax nuances to consider.

This makes Texas an attractive place for property investment and selling, as the tax burden is considerably lower.

Texas shares this advantage with other states like Florida, which also does not impose a capital gains tax at the state level. By understanding how Texas compares to other states in terms of capital gains tax rates, you can make better-informed decisions when investing in or selling property.

Types of Capital Gains: Short-Term and Long-Term

There are two types of capital gains: short-term and long-term. Short-term capital gains refer to profits earned from the sale of an asset held for less than a year, whereas long-term capital gains refer to profits derived from the sale of an asset held for more than a year.

The tax rates for these gains vary, with short-term capital gains being taxed as ordinary income and long-term capital gains typically taxed at either 15% or 20%, depending on your income tax bracket.

It’s crucial to understand the difference between short-term and long-term capital gains to minimize tax liability when selling property in Texas.

Short-Term Capital Gains

A short-term capital gain is defined as a profit attained from the sale of personal or investment property, a capital asset, that has been held for one year or less. The rate of taxation for short-term capital gains is contingent upon the regular tax bracket of the seller. This means that if you sell an asset within a year of purchasing it, you could be subject to a higher tax rate compared to long-term capital gains.

The main difference between short-term and long-term capital gains tax in Texas is that short-term gains are taxed at a higher rate for most sellers. Depending on your income, the tax rate for short-term capital gains could be significantly higher than the tax rate for long-term capital gains, which can impact your overall tax burden.

Long-Term Capital Gains

Long-term capital gains are profits derived from the sale of an asset that has been held for more than one year. The tax rates for long-term capital gains are generally lower than those for short-term capital gains, ranging from 0% to 20% depending on your taxable income and the type of asset. This lower tax rate is designed to encourage long-term investment and reduce the tax burden on investors, including the process of paying capital gains taxes.

The maximum capital gains tax that can be required on a home sale in Texas is 20%, which is the highest federal rate for this type of asset. If you’re planning on selling property in Texas, understanding the tax implications of long-term versus short-term capital gains can help you make more informed decisions and potentially save you money on your taxes.

Exemptions and Strategies for Reducing Capital Gains Tax in Texas

There are several exemptions and strategies available to reduce or avoid capital gains tax in Texas, such as the primary residence exemption, Section 1031 exchange, and income-based exemptions. These strategies can be advantageous in various circ*mstances, allowing you to reduce your tax burden and maximize the return on your property sale.

Primary Residence Exemption

The primary residence exemption is one of the most common exemptions from capital gains tax in Texas. To qualify for this exemption, the house must have been your primary residence for at least two years, you must have resided in the house for more than two years over the last five years, and you cannot have claimed an exemption on another property within the last two years.

If you meet these requirements, you are permitted to make up to $250,000 of profit (if single) or $500,000 (if married filing jointly) from the sale of your home tax-free. The primary residence exemption can significantly reduce or eliminate your capital gains tax liability when selling your home. By meeting the necessary qualifications, you can potentially save thousands of dollars in taxes and maximize the return on your property sale.

Because the exemption amount involves marriage status, be sure to consult a tax advisor if your situation is changing or has changed very recently. If you're selling your home during a divorce or your spouse has passed within the past two years or so, you may still be eligible to claim the higher $500,000 exemption if you meet the right criteria.

Section 1031 Exchange

A Section 1031 exchange is a tax-deferred exchange that permits capital gains taxes to be deferred, provided another “like-kind” property is purchased. This exchange is used by some of the most successful real estate investors and can be advantageous in a variety of circ*mstances, such as when seeking to reinvest the proceeds from the sale of a property into a more lucrative property.

To qualify for a 1031 exchange, the property being sold must be of a “like-kind” to the one being purchased, and the exchange must be completed within 180 days of the sale of the original property. According to the IRS, all real properties are generally like-kind, regardless of grade or quality (though definitely check with a qualified tax professional before planning on a 1031). However, real properties in the U.S. are not considered like-kind to foreign real properties.

By taking advantage of a Section 1031 exchange, you can defer capital gains taxes on the sale of an investment property, allowing you to reinvest the proceeds into another property without an immediate tax burden. This strategy can be particularly beneficial for investors looking to grow their real estate portfolios or exchange properties for more profitable investments.

Income-Based Exemptions

Income-based exemptions may reduce or eliminate one’s capital gains tax liability. In Texas, sellers with an annual taxable income that falls into the current 0% capital gains tax income bracket are exempt from taxation on net capital gains. By staying up-to-date with the current income thresholds and requirements on the IRS website, you can predict your potential tax burden and choose the right time to sell your home in Texas.

Calculating Your Capital Gains Tax Liability in Texas

To calculate your capital gains tax liability in Texas, you must first determine your net capital gains, which are the sum of income derived from the sale of capital assets, including both short-term and long-term capital gains, after accounting for any expenses or losses incurred from capital assets.

Once you’ve determined your net capital gains, you can then apply any exemptions or strategies to reduce your tax liability. Here’s a closer look at how to determine your net capital gains and apply exemptions and strategies. Once you have this information, you be more prepared to pay capital gains tax.

Determining Net Capital Gains

Net capital gains refer to the difference between the total long-term capital gain and the total short-term capital loss for the year, calculated by subtracting the total amount of capital losses from the total amount of capital gains. To determine your net capital gain, you’ll need to subtract the asset’s original cost basis or purchase price from the final sale price.

If you're calculating capital gains tax on a home sale and you've made capital improvements to the home, such as adding a pool, replacing the roof, installing storm windows, etc., you can add them to the cost basis of the house, reducing the net gains and your capital gains tax liability. However, ordinary home repairs do not count toward your cost basis.

The tax rate for net capital gains is contingent upon your taxable income for the year and may be 0%, 15%, or 20%. By accurately determining your net capital gains, you can ensure that you’re paying the appropriate amount of capital gains tax on your property sale and take advantage of any available exemptions or strategies to reduce your tax liability.

Applying Exemptions and Strategies

Once you’ve determined your net capital gains, you can apply any relevant exemptions and strategies to reduce your capital gains tax liability. For instance, if you qualify for the primary residence exemption, you can potentially exclude up to $250,000 (if single) or $500,000 (if married filing jointly) of profit from the sale of your home from capital gains tax.

Additionally, if you’re selling an investment property, you may be able to defer capital gains taxes by utilizing a Section 1031 exchange.

It’s essential to understand the requirements and qualifications for each strategy to ensure you’re taking full advantage of potential tax savings.

Selling Inherited Property in Texas: Capital Gains Tax Implications

When you sell an inherited property in Texas, you may be subject to capital gains tax. Inheritance tax and capital gains tax are two distinct taxes, and the capital gains tax must be paid when inherited property is sold in Texas. Let’s explore the differences between inheritance tax and capital gains tax and how to calculate capital gains tax on inherited property in Texas.

Inheritance Tax vs. Capital Gains Tax

Inheritance tax is a tax levied on the transfer of property or assets upon the death of an individual, whereas capital gains tax is a tax imposed on the profit earned from the sale of an asset. Texas does not have an inheritance tax, and there isn't a federal inheritance tax, either. However, when selling an inherited property in Texas, you may still be subject to federal capital gains tax.

It’s essential to understand the difference between inheritance tax and capital gains tax when selling inherited property in Texas to ensure you’re paying the correct amount of taxes.

Calculating Capital Gains Tax on Inherited Property

To calculate the capital gains tax on inherited property in Texas, you’ll need to determine the net capital gains, which is the difference between the property’s stepped-up cost basis (its value on the day it was inherited) and the final sale price. The tax rate for capital gains in Texas is contingent upon your tax bracket and filing status, ranging from 0% to 20%.

In some cases, short-term capital gains tax may be applicable if the property is sold with a gain in less than a year after inheritance, whereas long-term gains tax is applicable if the property is sold after a year or more.

The stepped-up cost basis resets the price of the property to its value the day it was inherited, which means that if the property is sold immediately after inheritance, there will be no capital gains tax owed.

By accurately calculating the capital gains tax on inherited property in Texas, you can ensure that you’re paying the appropriate amount of taxes and taking advantage of any available exemptions or strategies.

Reporting Capital Gains Tax on Texas Property Sales

When it comes to reporting capital gains tax on Texas property sales, you’ll need to file the appropriate federal tax forms and maintain accurate records. Reporting capital gains tax accurately is essential to comply with tax laws and avoid any potential penalties or interest.

Let’s explore the federal tax forms required for reporting capital gains tax in Texas and the recordkeeping requirements you need to adhere to.

Federal Tax Forms

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

It’s crucial to accurately complete and file these forms when reporting capital gains tax on Texas property sales. If you’re unsure about how to complete these forms or have questions about your specific tax situation, it’s always a good idea to consult with a tax professional to ensure compliance with tax laws and avoid any potential penalties.

Recordkeeping Requirements

It’s essential to maintain accurate records of your property transactions to ensure compliance with tax laws. Taxable entities are obligated to retain sales and use tax records for a minimum of four years. When you purchase property, you should keep the relevant tax records indefinitely to have a record of what you originally paid for it—essential to calculating capital gains.

Maintaining accurate records of your property sales, including purchase and sale prices, improvements made, and any related expenses, will help you accurately calculate your capital gains tax liability and report it on your federal tax forms. Proper recordkeeping can also help you take advantage of any available exemptions or tax credits. Home improvements can be added to your home's cost basis, reducing the amount of taxable capital gain you get from the sale.

Navigate Capital Gains Tax in Texas With Ease

Understanding the intricacies of capital gains tax in Texas can empower you to make more informed decisions when investing in or selling property, potentially saving you thousands of dollars in taxes and maximizing your return on investment. Armed with this knowledge, you can approach Texas property sales with confidence and take full advantage of the opportunities available to minimize your tax burden.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

Frequently Asked Questions

How do I avoid capital gains tax?

To minimize or avoid capital gains taxes, investing for the long term is often wise, since the long-term gains tax is usually lower than short-term. Additionally, using capital losses to offset gains and taking advantage of relevant exemptions can help.

Are all capital gains taxed at 15%?

No, not all capital gains are taxed at 15%. Long-term capital gains tax rates range from 0% to 20%, depending on your individual income and filing status. For a few types of assets, tax rates can be as high as 28%, though they won't be higher than your ordinary income tax bracket.

Is there a capital gains tax on selling a house in Texas?

Yes and no. Texas does not have a capital gains tax, because there are no income taxes in Texas. However, sellers subject to capital gains must report such gains when filing their federal income taxes.

However, because of the primary residence exemption, many home sellers in Texas are not liable for capital gains taxes. When selling a primary residence, most sellers are only liable if they make more than $250,000 (if filing as a single) or $500,000 (if married filing jointly) in profit.

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

The capital gains tax rate for rental properties in Texas is the same as it is for other types of property: the federal 0%, 15%, or 20% if you've owned the property for more than a year or the same as your federal ordinary income tax rate if you haven't. However, rental property doesn't qualify for the primary residence exemption.

You also must pay depreciation recapture tax. Depreciation expenses for income-producing real estate can be a major benefit on your annual taxes, and are retroactively taxed as ordinary income when you sell the property.

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

Capital gains taxes in Texas are only assessed at the federal level. The primary residence exemption offers homeowners a way to keep up to $250,000 (for single filers) or $500,000 (for joint filers) of profits from the sale of their home free from capital gains tax, so long as they:

• are selling their primary residence
• have owned the home for at least two of the past five years (consecutive or not)
• have lived in the home for at least two of the past five years (consecutive or not)
• have not claimed the exemption within the past two years

This exemption can be a great way to save money when selling a home—many home sellers in Texas can exclude their entire capital gain from being taxed.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.