What Texas Investors Need to Know About Capital Gains
Texas is one of nine states with no state income tax — a significant advantage for investors. A Californian selling the same appreciated property can owe up to 13.3% of the gain to Sacramento on top of federal tax; a Texan owes the state nothing. However, this benefit sometimes creates a false sense of security. Federal capital gains taxes fully apply to Texas residents, and for investors with substantial appreciated assets — especially real estate held for years — the federal bill alone can claim a quarter of the gain or more.
How Capital Gains Taxes Work
Capital gains tax applies when you sell an asset for more than your adjusted basis — generally what you paid, plus capital improvements, minus any depreciation you’ve claimed. The rate depends on two key factors:
Short-Term vs. Long-Term
- Short-term capital gains (assets held one year or less) are taxed at your ordinary income tax rate — as high as 37% for high-income earners.
- Long-term capital gains (assets held more than one year) receive preferential rates of 0%, 15%, or 20%, depending on your taxable income.
The brackets adjust for inflation each year. As a rough guide for 2026: the 0% rate covers taxable income up to about $49,000 (single) / $98,000 (married filing jointly); the 15% rate applies up to roughly $545,000 / $613,000; income above that pays 20%. Confirm the exact current thresholds with your CPA — where your other income lands you in these brackets often matters more than the sale itself.
The Net Investment Income Tax
High-income investors also owe the 3.8% Net Investment Income Tax (NIIT) on capital gains once modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly). This effectively raises the top long-term rate to 23.8% — before counting depreciation recapture.
Real Estate Capital Gains in Texas
Real estate produces the largest capital gains events most individual investors will ever face, and two extra layers make it more complex than selling stock:
Depreciation Recapture
If you’ve claimed depreciation on investment property (as most owners do — roughly 3.6% of the building’s value per year on residential rentals), the IRS recaptures it at sale, taxed at up to 25% — separate from, and in addition to, capital gains tax on the appreciation. After a decade of ownership, recapture is frequently the larger of the two numbers.
A Worked Example
Say you bought an Austin rental for $500,000, claimed $150,000 of depreciation over the years, and sell for $900,000:
| Component | Amount | Rate | Federal Tax |
|---|---|---|---|
| Depreciation recapture | $150,000 | 25% | $37,500 |
| Long-term capital gain | $400,000 | 20% | $80,000 |
| NIIT (on total $550,000 gain) | $550,000 | 3.8% | $20,900 |
| Total federal tax | ≈ $138,400 |
That’s about 25% of the total gain — in a state with “no capital gains tax.” (In California, state tax could add roughly another $73,000.) Run your own numbers in our free capital gains tax calculator, or see what you could defer instead with the 1031 exchange calculator.
Selling Your Home: The Primary Residence Exclusion
Different rules apply to your homestead. If you owned and lived in the home for at least two of the last five years, you can exclude up to $250,000 of gain ($500,000 married filing jointly) from federal tax entirely. With how far Texas home prices have run over the past decade, long-time Austin, Dallas, and Houston homeowners increasingly find their gain exceeds the exclusion — the excess is taxed as a long-term capital gain. The exclusion does not apply to rentals or investment property, though a former residence converted to a rental (or vice versa) may qualify for partial benefits under specific rules worth reviewing with your CPA.
Strategies for Managing Capital Gains
Texas investors have several tools available to manage federal capital gains exposure:
1031 Exchanges
Section 1031 lets you defer the entire federal tax bill — capital gains, depreciation recapture, and NIIT — by reinvesting the proceeds of an investment property sale into like-kind replacement property, including passive options like Delaware Statutory Trusts. In the example above, a full exchange defers all ~$138,400. Estimate your own deferral with the 1031 exchange calculator, and review the strict 45- and 180-day deadlines before you close the sale.
Opportunity Zone Investments
Reinvesting realized gains into a Qualified Opportunity Zone Fund within 180 days can defer the tax and, for long-term holds, eliminate tax on the fund’s future appreciation. Model the outcome with our Opportunity Zone calculator.
Intangible Drilling Cost (IDC) Programs
For accredited investors, oil and gas drilling partnerships generate large first-year deductions that can offset income in a high-gain year. These are speculative, illiquid private placements — but in the right situation they meaningfully soften a capital gains event. Estimate the deduction with the IDC estimator.
Tax-Loss Harvesting
Strategically realizing investment losses offsets gains elsewhere in your portfolio, reducing your overall liability for the year.
Installment Sales
Structuring a property sale as an installment sale spreads gain recognition over multiple tax years — potentially keeping more of the gain in the 15% bracket instead of the 20%+NIIT range.
Charitable Strategies
Donating appreciated assets directly to qualified charities can avoid capital gains tax entirely while generating a charitable deduction; donor-advised funds and charitable remainder trusts extend the same idea for larger positions.
Planning Ahead
The most effective capital gains strategies must be in place before the taxable event — a 1031 exchange, for instance, generally cannot be started after your sale has closed. If you’re considering selling appreciated property or other assets, talk to a qualified advisor and your tax professional while every option is still open. Contact Grace Capital Management to discuss your situation, or read our overview of tax strategies for accredited investors.
Key Takeaway: Living in Texas eliminates state-level capital gains taxes, but federal taxes remain substantial — often ~25% of the gain on long-held rental property. Proactive planning makes the difference in what you actually keep.
This article is educational only and is not tax, legal, or investment advice. Rates and thresholds change; confirm current figures and your specific treatment with your CPA.
Run Your Own Numbers
Use our Capital Gains Tax Calculator to estimate your federal tax liability and see the Texas advantage in real dollars.