What Is a Capital Gains Tax in Texas

The real estate market is a tempting arena to do business in, especially when it comes to property investing. Considering the generous financial rewards that property investors are able to make on the market, paying a tax on the property sale is no surprise or issue. But did you know that there are also capital gains on selling your house in some U.S. states?

That’s right, you don’t have to be a real estate investor to be taxed for selling a house. So do you pay capital gains for selling your house? Making a home sale in Texas comes along with a set of distinctive regulations and responsibilities. In this article, we will provide an explanation of what capital gains are, uncover what this tax is in Texas, and help you stay informed about your tax liabilities.

Capital Gains Tax

Hands holding documents with title capital gains tax

Understanding Capital Gains Tax

In short, capital gains are the main tax obligation when it comes to real estate sales. As good as it feels to receive the large sums of money in your bank account after selling property, these amounts are taxed. Capital gains tax for selling a home only applies to property that has been in your possession for over a year. In addition, the tax is obligatory only when there is a profit made from the sale. When selling the house for a higher price than you’ve purchased it at, the sale is considered a commercial transaction and is taxed as one.

Although capital gains tax on investment real estate sales is more popular, in some cases, selling your personal property can also be subject to tax. There are two major categories that capital gains fall into – short and long-term.

Short-Term Capital Gains Tax

The way that you are taxed on any capital gain, including real estate, stocks, bonds, or more, is based on the amount of time that you have held the asset prior to the sale. To make things easier to understand and for sellers to track their responsibilities, capital gains have been divided into short-term capital gains tax and long-term capital gains tax.

Short-term capital gain is applied when the asset sold has been in the possession of the owner for under one year. Capital gains, in general, are popular for being more favorable when compared to tax on salary or wages. However, short-term capital gains are not exposed to special tax rates and are, instead, taxed as standard income. They are, therefore, calculated based on one of seven tax rates applied in the U.S. and can reach up to 37%.

Long-Term Capital Gains

Long-term capital gains concern the sale of assets or real estate property that has been owned for over a year before the sale. Normally, the tax is calculated based on graduated thresholds for taxable income, ranging from 0% to 20%. On rare occasions, the capital gains tax may exceed 20%.

A lot of investors choose to hold on to their assets for a longer period in order to cut down on capital gains tax. If the sale is not urgent, it is the more logical decision to make when it comes to reducing the tax due.

Capital Gains Special Rates

There are special occasions when the calculation of capital gains or the time frames applied are different and unique. For instance, special rates apply to collectibles such as art, antiques, jewelry, stamp collections, coins, and others. The maximum rate that tax can reach under this category is 28%. 

In addition, small business stock is an interesting asset when it comes to calculating capital gains. We will look at some of the major special rate calculations and exceptions for real estate in Texas in particular in the following section. 

Learn more about capital gains tax in Texas and get the ease of paying them! 

Learning About the Exceptions

Do you pay capital gains when you sell a house? A popular capital gains tax exception is the personal residence exemption. If you cover a set of requirements that make you eligible for this exemption, you can make up to a certain amount from selling your home without having to pay any tax on the sale. The amounts that you can receive from the sale in order to qualify are up to $250,000 if you are registered as a single taxpayer or up to $500,000 if you pay taxes as a married couple or a joint filer.

Another requirement to be able to use this exemption is to have proof that the property being sold has been used as a home by you and has been your primary residence for no less than two years over the past five. Furthermore, you are not allowed to use this exemption numerous times but you can be partially exempt, depending on the situation.

There are other ways to avoid capital gains tax, including a like-kind exchange, in which you exchange one property for another. However, this option does not always exclude tax gains completely but rather delays the payment.

Your Tax Responsibilities

Are you interested to find out what your tax responsibilities will be if you are looking to sell your home in Texas? It’s worth mentioning that Texas successfully attracts homeowners thanks to the fact that there is no tax on income accumulated from property sales. But don’t let this confuse you. There are still certain federal taxed on the gains made for landowners.

When selling a property in Texas it must be announced and registered on the IRS’ federal tax return yearly report. The capital gains are registered in the “income” section of the tax return and inserted in a separate line item. This separates them from the yearly earned income of the taxpayer. The good news is that the Texas cap on capital gains is 15%.

Texas has a 0% state capital gains tax. However, it does have a combined rate of 25%, which takes into consideration the Federal capital gains rate, the 3.8% Surtax on capital gains, and the marginal effect of Pease Limitations.

Conclusion

It is important to have the right knowledge on capital gains tax in Texas before you sell a house to make things easier for you. Knowledge on the topic can save you money, time, and can help you sell your home without any stress or uncertainty. We buy houses and can offer a seamless and mutually beneficial sale process but we also want to help our partners stay informed and protected. We hope that this article has made capital gains easier to understand and will help you make better property sale decisions in the future.

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