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

Capital gains tax is a tax on the profit realized from the sale of an asset that has increased in value. When real estate is sold for more than its original purchase price, the difference typically represents a capital gain. This type of gain is subject to taxation, and real estate transactions often involve substantial amounts, making capital gains tax a significant financial consideration for sellers. Understanding how these gains are taxed is an important part of any real estate transaction.

Federal Capital Gains Tax on Real Estate

Capital gains tax on real estate transactions is primarily a federal tax, imposed by the U.S. government. The amount of federal tax owed depends on how long the property was owned before it was sold, categorizing the gain as either short-term or long-term. Short-term capital gains apply to assets held for one year or less. These gains are taxed at ordinary income tax rates, which can range from 10% to 37% for the 2024 tax year, depending on the taxpayer’s income bracket.

Long-term capital gains are realized from the sale of assets held for more than one year. These gains are taxed at more favorable rates than ordinary income, specifically 0%, 15%, or 20% for the 2024 tax year. The applicable long-term capital gains tax rate depends on the taxpayer’s taxable income and filing status. For instance, in 2024, single filers with taxable income up to $47,025 would pay 0% on long-term capital gains, while those with income between $47,026 and $518,900 would pay 15%.

High-income earners may also be subject to the Net Investment Income Tax (NIIT), an additional 3.8% tax. This tax applies to the lesser of a taxpayer’s net investment income or the amount by which their modified adjusted gross income (MAGI) exceeds specific thresholds. For the 2024 tax year, these thresholds are $250,000 for married individuals filing jointly, $125,000 for married individuals filing separately, and $200,000 for single or head of household filers.

For individuals selling a primary residence, a significant exclusion from capital gains tax may be available under Internal Revenue Code Section 121. This provision allows qualifying homeowners to exclude a certain amount of gain from their taxable income. A single taxpayer can exclude up to $250,000 of gain, while a married couple filing jointly can exclude up to $500,000. To qualify for this exclusion, the homeowner must have owned and used the property as their main home for at least two out of the five years leading up to the sale. This exclusion can significantly reduce or even eliminate the federal capital gains tax liability on the sale of a principal residence.

Texas State Tax Considerations

Texas does not impose a state income tax on its residents. Consequently, the state does not levy a state-level capital gains tax on the sale of real estate or any other assets. This means that when real property is sold in Texas, the capital gains tax burden is primarily limited to the federal taxes discussed previously. The absence of a state capital gains tax simplifies the tax landscape for real estate sellers in Texas.

Determining Your Capital Gain

Calculating the exact amount of capital gain is a necessary step before determining any tax liability. This calculation begins with understanding the property’s “basis,” which is generally the original purchase price. The basis can be adjusted to reflect additional costs incurred during ownership.

The “adjusted basis” includes the original purchase price plus certain acquisition costs and the cost of capital improvements made to the property. Acquisition costs can include legal fees, survey costs, title insurance, and transfer taxes paid when the property was initially acquired. Capital improvements are significant enhancements that add to the property’s value or prolong its useful life, such as adding a new roof, renovating a kitchen, or building an extension. If the property was an investment or rental property, depreciation deductions claimed over the years would reduce the adjusted basis.

To arrive at the capital gain, the “net sales price” must first be determined. This is calculated by taking the gross sales price of the property and subtracting eligible selling expenses. Common selling expenses include real estate agent commissions, legal fees, title insurance fees paid by the seller, and certain closing costs.

Once the adjusted basis and net sales price are known, the capital gain is determined using a straightforward formula: Capital Gain = Net Sales Price – Adjusted Basis. For example, if a property sold for a net sales price of $400,000 and its adjusted basis was $250,000, the capital gain would be $150,000. This calculated gain is the amount subject to federal capital gains taxation.

Reporting Real Estate Capital Gains

After determining the capital gain from a real estate sale, the next step involves reporting this gain to the Internal Revenue Service (IRS). This is typically done using specific tax forms that are part of the annual income tax return. Accurate record-keeping throughout the ownership period is crucial for proper reporting.

The primary forms used for reporting capital gains are Form 8949, “Sales and Other Dispositions of Capital Assets,” and Schedule D (Form 1040), “Capital Gains and Losses.” Form 8949 is used to detail each sale or exchange of a capital asset, including real estate. On this form, taxpayers report information such as the description of the property, the dates it was acquired and sold, the sales price, and the cost or other basis.

Transactions are categorized on Form 8949 as either short-term or long-term, depending on the holding period. The totals from Form 8949 are then transferred to Schedule D, which summarizes all capital gains and losses for the tax year. Schedule D calculates the net capital gain or loss and applies the appropriate tax rates.

Maintaining comprehensive records, including purchase and sale documents, receipts for capital improvements, and any depreciation records for investment properties, is important. These records support the figures reported on Form 8949 and Schedule D. They ensure compliance with IRS requirements and facilitate accurate tax calculation. The completed forms are then submitted as part of the taxpayer’s federal income tax return.