Does Texas tax you when you sell a home
November 30, 2022
The federal government taxes capital gains even on homes in Texas, which can often raise questions about how much you will have to pay if there are exemptions and exactly how they are taxed. Learn more about capital gains taxes for home sales in Texas to help you navigate and prepare for the tax process.
Are capital gains taxed on a residential sale in Texas?
Well… Yes and no. You will be taxed on capital gains on the sale of a home in Texas, but only by the federal government, not by the state of Texas. Texas does not have a state income tax and will not tax capital gains in any situation.
You may be able to avoid capital gains on a residential sale in Texas if you qualify for an exemption or use the money to reinvest in another property using a 1031 exchange.
How Texas Capital Gains Tax Works
Since Texas has no state income tax, there is no state capital gains tax, but the federal capital gains tax still applies. Capital gains occur when you sell a capital asset at a higher price than when you bought it. Just as the government taxes you on income, it also taxes any capital gains or capital gains that you have called capital gains tax.
Capital assets can include digital assets such as NFTs, bitcoins, jewelry, vehicles, coin collections, stocks, bonds or your home. It is important to remember that the tax is only based on realized gains, the actual amount you sold for. Unrealized gains are the potential gains you may see on the sale of the asset. But this number is only a projection and has no relation to the actual tax you must pay.
You can avoid paying capital gains tax if you qualify for exemptions, such as using your home as your primary residence or earning less than $40,400 if you are single or $80,800 if you are married. In these cases, your tax rate will be 0%.
The most typical tax rate for non-exempt filers is 15%, with a 20% rate if your income exceeds $445,850 if you are single or $501,600 if you are married and filing a joint return.
Example: A married couple sold a home for $450,000 that they bought for $320,000. They sold the home for $450,000 and made a $130,000 gain on a long-term investment, so they must pay 15% capital gains tax on that gain, or $19,500.
Texas capital gains rate versus prior years.
Texas is a non-income tax state, so it has no capital gains tax. The only tax payable on capital gains is to the federal government. Texas does this intentionally, and in 1993, voters approved Proposition 4, the Texas Income Tax Amendment, which prohibits a personal income tax without voter approval.
Texas versus other large U.S. states.
Compared to Texas, the capital gains tax on real estate in most other states is taxed, resulting in much higher taxes when selling homes. Remember, in every state, whether they have a state income tax, you must pay federal income tax unless you are exempt.
How to Avoid Capital Gains Tax in Texas
There are two legal ways to avoid paying capital gains tax on property or to reduce your tax liability for a particular tax year: exemptions and a 1031 exchange. If you qualify for an exemption, you could be exempt from paying taxes up to $500,000 if you are married or $250,000 if you are single.
According to the IRS, you qualify for an exemption if all the following conditions are met.
- You have owned the home for two of the last five years.
- You have lived in the home for two of the last five years prior to the date of sale.
- You have not acquired the home through an exchange in the last five years (such as a 1031 exchange).
- You are not subject to expatriation tax.
- You have not sold another home in the last two years for which you have claimed an exclusion.
- You have not used the home as a vacation or rental home after 2008.
- Or you did not use a portion of the dwelling outside the habitable area for commercial or rental purposes.
- The sale does not involve the transfer of a vacation property or a residual right.
There are some exceptions to these rules for members of the uniformed services and disabled citizens. Members of the uniformed services who serve a qualified long service may suspend, for up to 10 years, the 5-year period of ownership and residency.
Even if they have not lived at home for at least two years during the 5-year sale period, they may meet the 2-year residency requirement. Qualified long service is defined as:
Serving at a duty station at least 50 miles from their primary home or living in a government barracks on government orders. Being called or ordered to active duty for an indefinite period or for more than 90 days.
Uniformed service members include military, NOAA or Public Health Service, Foreign Service personnel, Peace Corps or Department of Defense employees, intelligence elements of the military branches, FBI, Department of the Treasury, Department of Energy, certain elements of the Department of State or Homeland Security, among other government employees.
Disabled citizens may qualify for an exemption after having lived in the home for only one of the five years prior to the sale.
Another possible exemption is based on your annual income. If you have an annual income of less than $40,400 if you are single or $80,800 if you are married, or if you are a qualifying widow or widower, you will pay 0% capital gains tax. Provided you hold the property for more than one year.
Although a 1031 exchange is not technically an exemption, it is a way to avoid paying capital gains tax, at least in the short term. An exchange does not eliminate the taxes you will have to pay on the property, but it will defer them by using the equity earned on the sale to invest in another property.
This method has some rules and complications, so it is important to know all of them before jumping into an exchange. First, the replacement property must be of equal or greater value than the one being sold. The replacement property must also be identified within 45 days of the sale and must be purchased within 180 days.
Also beware of cash payments which, if accepted before the exchange is completed, can disqualify the entire transaction and make all gains immediately taxable. Also note that if you do a 1031 exchange, you will not be eligible for an exemption if you attempt to sell the property within 5 years of the exchange.
How to report the sale of your Texas home for capital gains taxes
Even if you qualify for the federal capital gains tax exemption, you must still file a report with the IRS to report the sale of your home. Because Texas does not have a capital gains tax, there is no separate form to file for state taxes. Only federal capital gains tax forms are required.
If any of these are correct, you must report your gains to the federal government:
- You have a taxable gain on the sale of your home, and you do not qualify for the gain exclusion.
- You want to report your gain as taxable even though some or all of it qualifies for the exclusion. (This is a good idea if you plan to sell another primary residence within the next two years and will receive a larger gain from the sale of that property.)
- You received a Form 1099-S even if you did not receive a taxable gain.
If any of these are true, you must complete Form 8949 and then Schedule D (Form 1040). Using the information from Form 8949, report the gain from your home as capital gain on Schedule D. Depending on the amount of taxable gain from the sale of your home, you may need to increase your withholding or make estimated tax payments.
What about the sale of a Texas home you inherited?
There is no inheritance or estate tax in Texas. Inheritance tax is charged to the decedent’s heirs (similar to income tax), and estate tax is charged to the estate. There is also no state capital gains tax in Texas. If you inherit a residence, you don’t have to worry about paying state taxes on the property, even when you sell it.
While the federal government does have an estate tax, it does not consider inheritance as income for tax purposes, whether it be investments, property or cash. Once sold, you will only have to pay federal capital gains tax on the increase in value after inheriting it.
This means that if your parents bought a home for $250,000, and you inherit it worth $600,000 and sell it for $650,000, you will only pay capital gains tax on the $50,000 difference between the last two amounts unless you are exempt from tax.
Do you pay capital gains tax in Texas when you sell a second home?
You will pay federal capital gains tax. There is no capital gains tax in Texas.
Do you pay capital gains tax in Texas if you lose money on the sale of a home?
There is no capital gains tax in Texas, but if you lose money, there is no capital gain, so no tax.
How long do you have to own a home to avoid capital gains tax in Texas?
If you have lived in your home for two of the last five years, you may be eligible to claim capital gains tax on your tax return, thus avoiding paying it.
At what age do you no longer have to pay Texas capital gains tax?
There is no capital gains tax in Texas, so you will only pay federal capital gains tax. There is no age limit for federal capital gains tax.
Can you avoid capital gains in Texas if you reinvest in real estate?
This is called a 1031 exchange. It does not eliminate taxes, but it defers them each time you sell the property in which the capital gain was reinvested.
Article publidhed on November 30, 2022 by Josh Smith
Last Update November 30, 2022 by Josh Smith