Does Texas Have a Capital Gains Tax on Home Sales?
Texas has no state income tax and no state capital gains tax. But the federal government does tax real estate gains, and the primary residence exclusion — $250,000 for single filers, $500,000 for married couples filing jointly — has a ceiling that long-tenured Alamo Heights, Olmos Park, and Terrell Hills sellers often clear before they realize it. On gains above that line, federal rates run 15% to 20%, plus a 3.8% Net Investment Income Tax for high earners.
By Caroline Decherd & Susanne Marco | July 2 , 2026
You've owned your home in Olmos Park for 26 years. You bought it in 2000 for $380,000. It's worth $1.4 million today. You're finally thinking about selling.
Most sellers in that position assume they're walking away clean — Texas doesn't have a state income tax, so there's no capital gains problem, right?
Not exactly.
The federal government taxes home sale gains that exceed your exclusion, and at Tri-Cities price points, a lot of long-tenured sellers have more exposure than they expected. The good news: there are real ways to reduce what you owe. The less good news: you need to know about them before you list, not after you've already signed the contract.
The Exclusion, the Rate, and When the Math Gets Expensive
The federal primary residence exclusion works like this: if you've owned your home and lived in it as your primary residence for at least two of the last five years, you can exclude up to $250,000 in gains from taxable income if you're single, or $500,000 if you're married filing jointly.
That's meaningful protection — and for most American homeowners, it covers the entire gain. But in the Tri-Cities, where 2026 median sold prices run $1.05 million in Alamo Heights, $1.15 million in Terrell Hills, and $1.4 million in Olmos Park, a seller who's owned for 20-plus years can easily have appreciation well above that cap.
Here's what that looks like in practice. If you bought your home in Alamo Heights in 2001 for $325,000 and you're selling in 2026 for $1.05 million, your total gain is $725,000. After the $500,000 married exclusion, $225,000 of that gain is taxable.
Federal long-term capital gains rates — for gains held more than one year — run at 0%, 15%, or 20% depending on your total taxable income. Most Tri-Cities sellers, between their other income and the sale proceeds, land in the 15% or 20% bracket. On top of that, if your modified adjusted gross income exceeds $250,000 for a married couple, you also owe the 3.8% Net Investment Income Tax (NIIT).
So on $225,000 in taxable gain, the federal bill could run from $33,750 (at 15%) to $53,550 (at 20% + NIIT). That's real money — and it's money many sellers hadn't planned for.
Three Things That Lower What You Owe
The number above is the ceiling, not necessarily what you'll write a check for. There are three things that meaningfully reduce taxable gain, and most sellers underuse at least one of them.
Your adjusted cost basis. Your taxable gain isn't sale price minus purchase price — it's sale price minus your adjusted cost basis. Every capital improvement you made to the property can be added to your original purchase price, reducing the gain dollar for dollar. A new roof, a kitchen renovation, an addition, a pool, replaced HVAC, updated electrical — all of these count as capital improvements if you have documentation. Routine repairs and maintenance don't count, but major improvements do. Sellers who have owned for 20-plus years and have done significant work to their homes often have $75,000 to $200,000+ in basis adjustments sitting in their folders — or not, if they didn't keep records. This is one of the first conversations worth having before you list.
Your selling costs. Your agent's commission, title fees, settlement charges, and other direct costs of the sale are deducted from the net proceeds — which lowers the gain you report. On a $1 million sale in Texas, those costs typically run 7–9% of the sale price. That's $70,000 to $90,000 in deductions before you start counting improvements. Combined with documented capital improvements, many sellers find their taxable gain is significantly smaller than a back-of-the-envelope calculation suggested.
The 2-of-5 year rule and partial exclusions. You don't need to have lived in the home continuously — you need two years of use as your primary residence in the five-year window before selling. If you've temporarily rented the home, traveled for work, or haven't occupied it recently, this is worth reviewing carefully with your tax advisor. There are also partial exclusions available if you don't fully meet the test but had a qualifying life event — a job relocation, a significant health issue, or other unforeseen circumstances. The rules here are nuanced, but they exist.
What doesn't help: a 1031 exchange. That's a tool for investment and rental property, not for selling your primary residence and buying another home to live in.
Knowing your actual exposure before you list — not after you're under contract — gives you time to gather documentation, talk to your CPA about the bracket planning, and make an informed decision about timing. It also prevents the scenario where a seller discovers a surprise six-figure tax bill two weeks before closing with no room left to plan around it.
If you're thinking about selling your home in Alamo Heights, Terrell Hills, or Olmos Park this year, this is exactly the conversation worth starting early. Book a call and we'll walk through the numbers on your specific situation — including connecting you with the right tax advisor if you don't have one yet.
Frequently Asked Questions
Does Texas have a capital gains tax on home sales?
No. Texas has no state income tax and no state capital gains tax. Federal capital gains tax is the only tax that applies — and the federal primary residence exclusion ($250,000 for single filers, $500,000 for married couples filing jointly) eliminates it entirely for many sellers.
What is the federal capital gains exclusion for selling a home?
If you've owned and lived in your home as your primary residence for at least two of the last five years, you can exclude up to $250,000 in gains from federal tax if you're single, or $500,000 if you're married filing jointly. Gains above those amounts are taxable at long-term capital gains rates.
What federal rate applies if my gain is over $500,000?
Long-term capital gains above the exclusion are taxed at 0%, 15%, or 20% depending on your total taxable income. Sellers with modified adjusted gross income above $250,000 (married filing jointly) also owe the 3.8% Net Investment Income Tax, bringing the effective top rate to 23.8%.
Can home improvements reduce my capital gains tax?
Yes. Major capital improvements — documented renovations, additions, replaced systems, and similar work — add to your original purchase price and increase your adjusted cost basis. A higher basis means a smaller taxable gain. Selling costs (agent commission, title fees, closing charges) also reduce your net gain. Sellers who have owned for two or more decades and made significant improvements often find their taxable gain is substantially lower than a rough estimate suggests.
What if I don't fully meet the 2-of-5 year use requirement?
You may still qualify for a partial exclusion if you didn't meet the full two-year test because of a qualifying life event — including a job relocation, a significant health issue, or other unforeseen circumstances. The rules on partial exclusions are specific, so this is worth reviewing with a tax advisor before assuming you're disqualified.
About Caroline Decherd & Susanne Marco
Caroline Decherd and Susanne Marco are luxury real estate specialists serving Alamo Heights, Terrell Hills, Olmos Park, and San Antonio's historic central neighborhoods. With deep roots in the community and decades of combined experience, they guide buyers and sellers through one of Texas's most distinctive luxury markets.
