Is There Capital Gains Tax in Texas? What You Need to Know

Texas is known for its lack of a state income tax, which often leads to questions about whether capital gains are taxed at the state level. Since capital gains are considered taxable income in many states, understanding how Texas handles them is important for investors and property owners.

While Texas does not impose its own capital gains tax, federal taxes still apply. This means individuals selling assets like real estate or stocks may still owe taxes to the IRS. Understanding these rules can help taxpayers plan accordingly and take advantage of any exemptions that might reduce their tax liability.

Texas Income Tax Landscape

Texas does not levy a personal income tax, a policy enshrined in the state constitution. This means residents do not pay state taxes on wages, salaries, or investment income, including capital gains. The absence of an income tax makes Texas attractive to individuals and businesses looking to reduce their tax burden.

To compensate, Texas relies on property and sales taxes. The state sales tax rate is 6.25%, with local jurisdictions allowed to add up to 2%, bringing the total to as much as 8.25% in some areas. Property taxes, among the highest in the country, fund local governments and school districts. These taxes are assessed at the county level, with rates varying based on location and property value.

Federal Capital Gains in Texas

Although Texas does not tax capital gains at the state level, residents must still pay federal taxes on profits from selling investments, businesses, and other assets. The IRS categorizes capital gains as either short-term or long-term, depending on how long the asset was held before being sold.

Short-term capital gains, from assets held for one year or less, are taxed as ordinary income, with rates ranging from 10% to 37%, depending on the taxpayer’s income bracket. Long-term capital gains, from assets held for more than a year, are taxed at lower rates—0%, 15%, or 20%—based on taxable income. As of 2024, single filers pay 15% on gains above $47,025, while the 20% rate applies to those earning more than $518,900. For married couples filing jointly, the 15% rate starts at $94,050, and the 20% rate applies above $583,750.

High-income earners may also be subject to the 3.8% Net Investment Income Tax (NIIT) on capital gains, dividends, and other investment income. This tax applies to individuals with a modified adjusted gross income above $200,000 ($250,000 for married couples filing jointly), increasing the effective tax rate for those affected.

Real Estate Transactions

Selling property in Texas can result in federal capital gains taxes, depending on how long the property was owned and whether it was a primary residence or an investment property.

The IRS allows homeowners to exclude up to $250,000 in gains for single filers and $500,000 for married couples filing jointly if they have lived in the home for at least two of the last five years before selling. For example, if a married couple sells their home for a $450,000 profit, they would owe no federal capital gains tax. However, if the gain exceeds these limits, the excess is taxed at long-term capital gains rates.

Investment properties and second homes do not qualify for this exclusion, meaning all gains on these sales are taxable. However, investors can use a 1031 exchange to defer taxes by reinvesting proceeds from one investment property into another of equal or greater value. This strategy allows investors to postpone capital gains taxes, provided they follow IRS guidelines, including strict deadlines for identifying and purchasing the replacement property.

Gains From Stocks and Other Assets

Selling stocks, bonds, and other financial instruments can generate taxable capital gains. Investors must track their cost basis—the original purchase price of an asset—to determine the taxable gain when selling. Brokerages report cost basis information on Form 1099-B, but taxpayers are responsible for ensuring accuracy, particularly when transferring assets between accounts.

For those with stock-based compensation, such as restricted stock units (RSUs) or incentive stock options (ISOs), tax treatment varies. RSUs are taxed as ordinary income upon vesting, with any subsequent appreciation subject to capital gains tax upon sale. ISOs, if held for at least two years from the grant date and one year from the exercise date, qualify for long-term capital gains rates instead of ordinary income tax. However, exercising ISOs can trigger alternative minimum tax (AMT) liabilities if not managed properly.

Exemptions That Could Apply

Several exemptions and deductions can reduce or eliminate capital gains taxes, depending on the type of asset sold and the taxpayer’s income level.

One key exemption is the lifetime exclusion for small business stock under Section 1202. Investors who hold qualified small business stock (QSBS) for at least five years may exclude up to 100% of capital gains from taxation. To qualify, the stock must be issued by a C corporation with gross assets under $50 million at the time of issuance. The exclusion is capped at the greater of $10 million or 10 times the taxpayer’s basis in the stock, offering significant tax savings for early-stage investors.

Another important exemption applies to inherited assets through the step-up in basis rule. When heirs inherit property, the cost basis is adjusted to the asset’s fair market value at the time of the original owner’s death. If the beneficiary sells the inherited asset immediately, there may be little to no capital gains tax owed. This rule benefits heirs of real estate and stock portfolios that have appreciated significantly over time, as it eliminates taxes on decades of unrealized gains.