Introduction
Texas does not have a state income tax, which means there is no state-level capital gains tax. However, Texans are still subject to federal capital gains tax, which applies when selling assets such as real estate, stocks, and businesses at a profit.
This guide explains how capital gains tax works, how to reduce your tax liability, and strategies to legally avoid paying more than necessary.
Does Texas Have a Capital Gains Tax?
No, Texas does not impose a state-level capital gains tax. However, all Texas residents must pay federal capital gains tax on eligible asset sales.
What Is Capital Gains Tax?
Capital gains tax is a tax on the profit from selling an asset. The IRS classifies gains into two categories:
- Short-term capital gains (held for one year or less) – Taxed as ordinary income (up to 37%).
- Long-term capital gains (held for more than one year) – Taxed at preferential rates (0%, 15%, or 20%).
Federal Capital Gains Tax Rates for 2025
| Filing Status | 0% Rate (Up to) | 15% Rate | 20% Rate (Over) |
|---|---|---|---|
| Single | $47,025 | $47,026 – $518,900 | $518,901+ |
| Married Filing Jointly | $94,050 | $94,051 – $583,750 | $583,751+ |
| Head of Household | $63,000 | $63,001 – $551,350 | $551,351+ |
Example Calculation
- You buy stock for $50,000 and sell it two years later for $100,000.
- Your capital gain is $50,000.
- If your taxable income is $80,000, you fall in the 15% tax bracket.
- You will owe $7,500 in capital gains tax ($50,000 × 15%).
How Capital Gains Tax Applies to Different Assets
Real Estate
- Primary Residence – If you have lived in your home for at least two of the last five years, you may exclude $250,000 ($500,000 for married couples) of capital gains from tax.
- Rental or Investment Property – Subject to capital gains tax unless 1031 Exchange is used.
Stocks & Investments
- Selling stocks, mutual funds, or cryptocurrency can trigger capital gains tax.
- Holding investments for more than one year results in lower tax rates.
Business Sales
- If you sell a business, profits may be taxed at capital gains rates or ordinary income rates, depending on the structure.
How to Reduce or Avoid Capital Gains Tax in Texas
1. Use the Primary Residence Exclusion
- If you have lived in your home for at least two of the last five years, you can exclude up to $250,000 ($500,000 for married couples) in gains.
2. Hold Investments for More Than One Year
- Short-term capital gains are taxed higher than long-term capital gains.
- Holding assets for at least one year can lower your tax rate.
3. Utilize a 1031 Exchange for Real Estate
- Allows deferral of capital gains tax if proceeds are reinvested in a like-kind property.
4. Offset Gains with Capital Losses (Tax-Loss Harvesting)
- Capital losses can offset gains dollar for dollar.
- If losses exceed gains, you can deduct up to $3,000 per year against ordinary income.
5. Contribute to Retirement Accounts
- Selling assets within an IRA, 401(k), or Roth IRA avoids immediate taxation.
- Roth IRA withdrawals are tax-free if held for five years.
6. Move to a No-Income-Tax State (Like Texas)
- Texas residents do not owe state capital gains tax, reducing overall tax liability.
How Does Capital Gains Tax Apply to Texas Real Estate?
| Real Estate Type | Tax Treatment | Ways to Reduce Tax |
|---|---|---|
| Primary Home | Up to $250,000/$500,000 in gains exempt | Live in home 2+ years before selling |
| Rental Property | Taxed at capital gains rates | Use 1031 Exchange to defer tax |
| Land Sales | Subject to capital gains tax | Offset with capital losses |
| Flipping Homes | Treated as ordinary income | Hold 1+ years to get lower rate |
What Happens If You Don’t Pay Capital Gains Tax?
Failing to report capital gains can result in:
- IRS penalties and interest charges.
- Tax audits and legal consequences.
- Loss of eligibility for deductions and tax credits.
How to Report Capital Gains on Your Tax Return
| Asset Sold | IRS Form Required |
|---|---|
| Stocks & Investments | Form 8949 & Schedule D |
| Real Estate | Form 4797 (Investment Property) |
| Business Sale | Form 4797 or Schedule D |
| Cryptocurrency | Form 8949 & Schedule D |
Capital Gains Tax Planning for Texas Residents
- Sell assets during low-income years to qualify for 0% tax rate.
- Consider charitable giving to offset gains.
- Use installment sales to spread gains over multiple years.
- Defer gains with opportunity zone investments.
Should You Work with a CPA for Capital Gains Tax?
A CPA can help:
- Determine if capital gains exclusions apply.
- Identify strategies to minimize tax liability.
- Ensure accurate tax reporting to avoid IRS penalties.
Conclusion
Texas residents do not pay state capital gains tax, but they are still responsible for federal capital gains tax. By using strategic tax planning, individuals can reduce or defer capital gains tax liability.
For expert capital gains tax planning, schedule a meeting with our CPA Anshul Goyal by clicking at https://calendly.com/anshulcpa/ now.
Frequently Asked Questions (FAQs)
1. Do Texas residents pay capital gains tax?
No, Texas does not have a state capital gains tax, but federal capital gains tax still applies.
2. What is the capital gains tax rate in 2025?
- 0% for income up to $47,025 (single filers).
- 15% for income between $47,026 – $518,900.
- 20% for income over $518,901.
3. How can I avoid capital gains tax on my home sale?
If you lived in the home for 2+ years, you can exclude up to $250,000 ($500,000 for married couples) in gains.
4. Does a 1031 Exchange eliminate capital gains tax?
No, but it defers tax if you reinvest in a like-kind property.
5. Can I write off capital losses against gains?
Yes, you can offset capital gains with capital losses, and deduct up to $3,000 per year against regular income.