Capital Gains When You Sell a Texas House: The $250,000 Rule
No state income tax does not mean no tax. The federal exclusion, what counts toward your basis, and the two-of-five-year test that trips up relocations.
This is general information rather than tax advice, and the numbers involved are large enough that a conversation with a CPA before you list is cheap insurance.
The headline is reassuring for most homeowners: the great majority of people selling a house they actually lived in owe nothing. The cases where that is not true are specific and knowable in advance.
No State Income Tax, Federal Tax Still Applies
Texas has no state income tax, so there is no state capital gains tax on a home sale. That is a genuine advantage over selling in a state that taxes the gain.
Federal capital gains rules apply in full. The reason most homeowners pay nothing is not the absence of a state tax; it is the federal exclusion for a principal residence.
The Exclusion, and the Two-of-Five Test
If you sell your principal residence, you may generally exclude up to $250,000 of gain if you file singly, or $500,000 if you are married filing jointly.
To qualify, in outline:
- Ownership: you owned the home for at least two of the five years before the sale.
- Use: you used it as your principal residence for at least two of those five years. The two years need not be continuous.
- Frequency: you have not claimed the exclusion on another home within the preceding two years.
- For the $500,000 amount, both spouses must meet the use test, though only one need meet the ownership test.
Given typical North Texas appreciation, most owners selling a home they lived in for several years are comfortably inside the exclusion and owe nothing. The situations to check carefully are long tenures in strongly appreciating areas, sales after a relatively short ownership, and any property that was rented at some point.
Basis Is Where the Money Is
Gain is not sale price minus purchase price. It is amount realised minus adjusted basis, and both ends of that have adjustments most sellers never make.
| Increases basis | Reduces amount realised |
|---|---|
| Original purchase price | Real estate commissions |
| Certain purchase closing costs | Title and escrow fees you paid |
| Additions and structural work | Other selling expenses |
| A new roof, HVAC, windows | |
| Kitchen and bathroom remodels | |
| Landscaping that adds lasting value | |
| A pool, a patio, a fence |
Capital improvements count; ordinary repairs and maintenance generally do not. Replacing a roof is an improvement. Patching one is a repair. In practice, twenty years of ownership in North Texas produces a large amount of capital improvement, and a homeowner who kept the receipts has a materially higher basis than one who did not.
Which is the practical lesson of this whole post: keep every receipt, starting now, even if you expect the exclusion to cover you. Circumstances change.
The Partial Exclusion Nobody Knows About
If you fail the two-year test, you may still qualify for a partial exclusion when the sale is caused by a qualifying reason, which broadly covers:
- A change in place of employment
- Health reasons
- Certain unforeseen circumstances defined by the rules
The partial exclusion is prorated by the portion of the two-year period you did satisfy, and it applies to the exclusion amount rather than to the gain, which usually makes it more generous than people expect.
This matters a great deal in a metro like this one, where corporate relocation moves people on somebody else’s timetable. A household transferred after eighteen months frequently assumes they have lost the benefit entirely. Ask a CPA rather than assuming. The relocation context.
Rentals Are a Different Calculation
Three differences, and each one surprises somebody every year:
- The principal residence exclusion generally does not apply to an investment property.
- Depreciation is recaptured. Depreciation you claimed, and in some cases depreciation you could have claimed but did not, is taxed at its own rate on top of the capital gain. This is the item most commonly missed by accidental landlords.
- A 1031 exchange can defer both, and it has to be structured before you close. A qualified intermediary must be engaged in advance; you cannot take the proceeds and then decide to exchange. How the 45 and 180 day rules work.
A common North Texas situation deserves its own note: a homeowner who moved, rented out their old house for a few years, and now wants to sell. The exclusion may still be partly available depending on the timing, and the depreciation recapture applies regardless. That combination is genuinely complicated and is exactly the case for professional advice. Selling a tenant-occupied property.
What to Keep, Starting Today
- Your purchase settlement statement. It establishes your starting basis. Put it somewhere permanent.
- Every invoice for capital improvements, with dates and descriptions. Photograph paper receipts, which fade.
- Permits and inspection records for structural work.
- Your sale settlement statement, when the time comes.
- Documentation of anything unusual: a period of rental use, a partial business use, an inherited interest, or a divorce transfer.
Two related pieces that complete the picture: the stepped-up basis on inherited property, which frequently eliminates gain entirely, and transfers on divorce, which have their own rules.
And before you set expectations about what a sale leaves you with, separate the two questions. Net proceeds is what lands in your account after costs, which you can model in the net proceeds calculator. Tax is a separate calculation on top of it, and for most owners of a principal residence in this state the answer to the second one is nothing.
Frequently Asked Questions
Do you pay capital gains tax when selling a house in Texas?+
There is no Texas state income tax, so no state capital gains tax, but federal capital gains rules apply in full. For most homeowners selling a principal residence, the federal exclusion eliminates the tax entirely: up to $250,000 of gain for a single filer and $500,000 for a married couple filing jointly.
What is the two out of five year rule?+
To claim the exclusion you must generally have owned the home and used it as your principal residence for at least two of the five years before the sale. The two years of use need not be continuous, and ownership and use are tested separately, which matters for people who rented before buying the same property.
How often can you use the capital gains exclusion on a home?+
Generally once every two years. If you claimed the exclusion on another home sale within the two years preceding this one, you are usually not eligible for the full exclusion again, though a partial exclusion may apply if the sale is caused by a qualifying change in employment, health or unforeseen circumstances.
What improvements reduce capital gains on a home sale?+
Capital improvements add to your basis and therefore reduce gain: additions, a new roof, HVAC replacement, a new kitchen, landscaping that adds value, and similar work with a lasting effect. Ordinary repairs and maintenance generally do not. Selling costs, including commissions and title fees, also reduce the amount realised.
Do you pay capital gains on a rental property in Texas?+
Yes, and it works differently. The principal residence exclusion generally does not apply, and depreciation you claimed or could have claimed is recaptured at its own rate on top of the capital gain. A 1031 exchange can defer both, and it must be structured before closing rather than afterwards.
Run Your Own Numbers
About the Author
Licensed Realtor · DFW North Texas
Specializing in Plano, Frisco, McKinney, and Allen. Helping buyers and sellers navigate North Texas since 2015, with honest advice, deep local knowledge, and no pressure.
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