Capital gains tax on real estate is the federal tax you owe on the profit from selling a house, rental, or land. In Texas, there is no separate state layer on top of it, since Texas collects no state income tax, which changes the math for every seller in the state, and in Texas, capital gains tax on real estate looks different than it does in California or New York.
Selling property in 2026 without knowing these rules can cost thousands. The IRS updated its brackets again this year, and the rules around depreciation, exclusions, and exchanges haven’t gotten any simpler.
Key Takeaways
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What Is Capital Gains Tax and How Does It Apply to Real Estate?
Capital gains tax is the tax on profit you make when you sell an asset for more than you paid. For real estate, that profit equals your sale price minus your adjusted basis, which is your purchase price plus qualifying improvements minus any depreciation you claimed.
The federal government taxes this profit whether you sell a personal home, a rental house, raw land, or a commercial building. Capital gains taxes on real estate apply the moment the sale closes.
Texas residents get one real advantage here. Because the state charges no personal income tax, there’s no state-level add-on to the capital gains tax on real estate bill. Sellers in Texas only deal with the IRS, not a second state return on top of it.
Short-Term vs. Long-Term Capital Gains on Property
How long you owned the property before selling decides your tax rate, and the difference is significant. Property held one year or less falls under short-term rules; property held longer than a year qualifies for long-term treatment.
Short-term gains on real estate get taxed as ordinary income, at rates from 10% up to 37% depending on your bracket. Long-term gains get the preferential 0%, 15%, or 20% rates instead.
| Holding Period | Tax Treatment | 2026 Rate Range |
| 1 year or less (short-term) | Ordinary income rates | 10% to 37% |
| More than 1 year (long-term) | Preferential capital gains rates | 0%, 15%, or 20% |
The table above shows timing a sale matters because holding a property just a few extra weeks to cross the one-year mark can cut your capital gains tax on real estate bill by more than half in some brackets.
How to Calculate Your Capital Gain on a Real Estate Sale
Your capital gain is your sale price minus your adjusted basis, and the calculation runs in four steps.
- Start with your purchase price, including closing costs from when you bought the property.
- Add capital improvements, such as a new roof, a kitchen remodel, or an added room. Routine repairs like painting don’t count.
- Subtract depreciation you claimed on the property if it was a rental or business asset. This lowers your basis and raises your taxable gain.
- Subtract your adjusted basis from your net sale price (sale price minus selling costs like agent commissions) to get your capital gain.
| Example: You bought a rental for $220,000, spent $30,000 on a new roof and foundation repair, and claimed $40,000 in depreciation over the years.
Your adjusted basis is $220,000 + $30,000 − $40,000 = $210,000. If you sell for $350,000 and pay $21,000 in selling costs, your net sale price is $329,000, and your gain is $119,000. |
A real estate capital gains tax calculator can run these numbers for you, but understanding the mechanics helps you catch errors before they cost you.
The $250,000 / $500,000 Primary Residence Exclusion
Section 121 of the tax code lets home sellers exclude up to $250,000 of profit (single filers) or $500,000 (married filing jointly) from capital gains tax on a home sale.
To qualify, you need to meet the ownership and use test:
- You owned the home for at least 2 of the last 5 years before the sale.
- You lived in it as your main residence for at least 2 of the last 5 years.
- You haven’t used this exclusion on another home sale in the past 2 years.
| Example: A married couple bought their Corpus Christi home for $180,000 and sold it 12 years later for $610,000. Their profit is $430,000. Because they’re married, filed jointly, and lived there the whole time, the entire $430,000 falls under the $500,000 exclusion. They owe zero federal capital gains tax on the sale. |
Capital Gains Tax on Rental and Investment Properties
Rental and investment properties don’t get the Section 121 exclusion, so the full gain is taxable.
Investors owe long-term capital gains tax at 0%, 15%, or 20% if they held the property for over a year, based on the 2026 brackets below.
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
| Single | Up to $49,450 | $49,451–$545,500 | Above $545,500 |
| Married Filing Jointly | Up to $98,900 | $98,901–$613,700 | Above $613,700 |
The current capital gains tax rates shown here apply to your total taxable income, including the gain itself. A seller near a bracket edge can sometimes shift into a lower rate simply by timing the sale for a lower-income year.
Depreciation Recapture and the Net Investment Income Tax (NIIT)
Depreciation recapture is a separate tax on the portion of your gain that matches the depreciation you deducted over the years you owned the rental. The IRS taxes this slice, known as unrecaptured Section 1250 gain, at your ordinary rate, capped at 25%.
Using the earlier example, the $40,000 in depreciation you claimed gets taxed at up to 25% first, and only the remaining gain gets the standard 0/15/20% treatment.
The Net Investment Income Tax (NIIT) adds another 3.8% on top of everything else. It is a surtax on investment income, including real estate gains, once your modified adjusted gross income tops $200,000 (single) or $250,000 (married filing jointly).
Combined, a high-income investor’s top effective federal rate on real estate profit can reach 23.8%, before recapture is even added in.
Strategies to Reduce or Defer Capital Gains Tax on Real Estate
Several legal strategies exist to reduce capital gains tax on real estate, and most take planning before the sale closes.
- Use a 1031 exchange. Selling an investment property and rolling the full proceeds into another “like-kind” property defers the gain entirely. You must identify a replacement within 45 days and close within 180 days.
- Time the sale around your income. Selling in a year with lower ordinary income can push your gain into the 0% or 15% bracket instead of 20%.
- Harvest capital losses. Selling a losing investment in the same year offsets gains from your property sale, dollar for dollar.
- Convert a rental into a primary residence. Living in a former rental for at least 2 years before selling can qualify part of the gain for the Section 121 exclusion, though depreciation recapture still applies.
- Hold until death. Heirs receive a stepped-up basis to the property’s fair market value at death under Section 1014, which can erase decades of built-up gain entirely.
Least-Known Mistakes Sellers Make With Capital Gains Tax
Forgetting to add capital improvements to basis. Sellers who skip this step overpay tax on money they already spent on the property. The other least-known mistakes are:
- Missing the 45-day identification window on a 1031 exchange.
- Assuming inherited property carries the original owner’s basis. It doesn’t; heirs get a stepped-up basis, which most people don’t realize until they’ve already overpaid.
- Selling a converted rental too soon. Moving back into a rental for less than 2 years before selling forfeits the primary residence exclusion entirely.
- Ignoring the non-qualified use rule. Time a property spent as a rental before becoming your main home reduces your exclusion on a prorated basis.
How Hopkins CPA Can Help You Minimize Capital Gains Tax on Real Estate
Selling property in Texas without a plan for capital gains tax on real estate almost always leaves money on the table. Hopkins CPA Firm has spent over 150 years of combined team experience solving exactly this for sellers across Texas and beyond.
Here’s how Hopkins CPA can help:
- We calculate your adjusted basis correctly, including every improvement and depreciation entry the IRS actually recognizes.
- We structure 1031 exchanges and time sales around your full tax picture, not just the real estate piece.
- We identify whether the Section 121 exclusion, a stepped-up basis, or a loss-harvesting strategy fits your specific sale.
- We handle the estate tax planning side for sellers holding inherited property and the individual tax planning side for everyone else.
We’ve represented over 10,000 IRS cases, and property sales that go wrong on the tax side often turn into exactly the kind of cases we resolve. Book a consultation with us before you list the property.
Conclusion
Capital gains tax on real estate in Texas depends on how long you held the property, whether it was your home or an investment, and how much depreciation you claimed along the way.
The Section 121 exclusion erases the tax for most home sellers, while investors need tools like 1031 exchanges, loss harvesting, and basis tracking to keep more of their profit.
Hopkins CPA Firm builds that plan before you sell, not after the IRS sends a notice. Our team, which includes former IRS agents and revenue officers, reviews your specific numbers against every legal strategy on the table. Contact Hopkins CPA Firm to map out your sale before you sign anything.
FAQs
No, most sellers pay nothing. The $250,000 (single) or $500,000 (married) exclusion under Section 121 wipes out the taxable gain for the majority of home sales.
Subtract your adjusted basis (purchase price plus improvements minus depreciation) from your net sale price. The gain is then taxed at 0%, 15%, or 20%, plus possible NIIT.
Depreciation recapture is the portion of your gain equal to the depreciation you claimed on the property. The IRS taxes it at your ordinary rate, capped at 25%.
Yes, a 1031 exchange defers the tax by rolling proceeds into a new investment property. You must identify a replacement within 45 days and close within 180 days.
Yes, but not in Texas. Texas charges no state income tax, so sellers here owe only the federal rate, unlike sellers in states such as California.
Only on profit above the $250,000/$500,000 exclusion, and only if you meet the 2-of-5-year ownership and residency requirement.
Most sellers fall in the 15% federal bracket, plus up to 25% on depreciation recapture and a possible 3.8% NIIT surtax above the income thresholds.
It's $250,000 for single filers and $500,000 for married couples filing jointly on profit from selling a home used as your main residence.
You can't avoid it entirely, but a 1031 exchange, the Section 121 exclusion, or selling in a lower-income year can reduce or defer what you owe.
