Does Texas have a capital gains tax on home sales?

No. Texas does not impose a state income tax, and because capital gains are a form of income, there is no state-level capital gains tax on the profit from selling your home in Texas. This applies to all Texas residents: Frisco, Plano, McKinney, Prosper, Allen, and Celina homeowners alike. The Texas Comptroller of Public Accounts confirms that the state of Texas imposes no personal income tax of any kind (Texas Comptroller of Public Accounts, 2026). What you earn from selling your home does not flow through a Texas income tax return because that return does not exist.

This is one of the structural advantages of living in Texas, and it is a real one. In a state like California, a seller in the top income bracket would owe California state income tax of up to 13.3% on any capital gain not sheltered by the federal exclusion. Texas sellers owe zero to the state, regardless of how large the gain is. That difference matters especially for sellers with very large gains, inherited properties, or short-tenure situations where the federal exclusion does not fully apply.

But stopping at “Texas has no income tax” gives sellers a false sense of security. The federal government still has a claim on your gain, and the rules governing how much of that gain is taxable are more nuanced than most sellers realize. Understanding those federal rules, and the two major exclusions that eliminate tax for most homeowners, is where the real planning work happens.

What do the federal capital gains rules actually say?

Capital gains tax at the federal level is a tax on the profit you make when you sell an asset for more than you paid for it. For a home, that profit is the difference between your sale price and your cost basis, which is generally what you paid for the home plus the cost of any qualifying improvements you made while you owned it. If a North Dallas seller sells their home for $600,000 and their cost basis is $350,000, the capital gain is $250,000, before any exclusion is applied.

The federal capital gains tax rates that apply to a home sale depend on two things: how long you owned the home, and your total taxable income in the year of the sale. For assets held more than 12 months before sale (which covers the overwhelming majority of homeowners), the long-term capital gains rates for 2026 are as follows (IRS Revenue Procedure 2025-32):

• 0% on gains for single filers with taxable income up to $49,450; married filing jointly (MFJ) up to $98,900
• 15% on gains for most middle-income taxpayers above those thresholds
• 20% on gains for single filers with income above $545,500; MFJ above $613,700

For assets held 12 months or less (short-term gains), the gain is taxed as ordinary income at your marginal federal income tax rate, which can reach 37% in the top bracket. This is a meaningful distinction for sellers who bought and are selling within the same year, or who are selling investment property they held briefly.

The key point: before these rates apply, the IRS gives most homeowners a very large shelter in the form of the primary residence exclusion under IRC Section 121. If your gain falls under that exclusion, you may owe nothing at the federal level either.

How does the $250K/$500K primary residence exclusion work?

The most important piece of tax law for homeowners selling their primary residence is Internal Revenue Code Section 121, also detailed in IRS Publication 523 (IRS Publication 523, Selling Your Home). This provision allows eligible sellers to exclude a substantial portion of their capital gain from federal income tax entirely:

• $250,000 exclusion for single filers
• $500,000 exclusion for married couples filing jointly

To qualify for the full exclusion, a seller must meet the ownership and use test: the home must have been your primary residence for at least two of the last five years before the date of sale (IRC §121). The two years do not need to be consecutive, and they do not need to be the two most recent years, as long as they fall within the five-year lookback window. A seller who moved out of their home 18 months ago but lived there for three years before that likely still qualifies, depending on the specific dates.

In practical terms, this exclusion eliminates federal capital gains tax entirely for most North Dallas homeowners who have lived in their home for several years. A married couple who bought their Frisco home for $400,000 and sell it for $850,000 have a capital gain of $450,000. With the $500,000 MFJ exclusion fully applied, their entire gain is sheltered and they owe zero federal capital gains tax on the sale (IRS Publication 523).

The exclusion resets: a seller can use the IRC §121 exclusion as many times as they want, but not more than once every two years (IRC §121(b)(3)). This prevents the exclusion from being used as a short-cycle tax strategy, but it does not limit how many homes a person can sell tax-free over the course of a lifetime, provided the two-year gap between uses is observed.

“Buying a house is a lot like eating an elephant. You do it one step at a time.”

The same approach applies to understanding your tax position before a sale: break it down into its parts, confirm which exclusions apply to your specific situation, and work through the math with your CPA before you sign a listing agreement. The numbers are manageable when you see them clearly and in advance.

When the exclusion does not apply

The IRC §121 exclusion is powerful, but it is not automatic. Several common scenarios result in a partial or total loss of the exclusion, and sellers in these situations face a federal tax bill they may not have anticipated.

Short tenure: owning the home for less than two years

The most common disqualifier is the two-year ownership and use requirement. A seller who purchased a Plano home in January 2025 and needs to sell in November 2025 has held the home for under two years and does not qualify for the full IRC §121 exclusion. The entire gain is subject to federal tax, and because the holding period is under 12 months, it is taxed as ordinary income rather than at the more favorable long-term capital gains rate. This is the highest-tax scenario for a homeowner, and it is worth knowing before buying a home you might need to sell quickly.

Vacation homes and investment properties

The primary residence exclusion does not apply to vacation homes or rental properties. If you sell a lake house in East Texas that you rent out for income and visit on weekends, the IRC §121 exclusion does not shelter the gain. The entire profit is subject to federal capital gains tax. There is a separate provision under IRC §1031 (like-kind exchanges) that allows real estate investors to defer capital gains on investment property by rolling the proceeds into another qualifying investment property within a specific timeframe, but that rule is for investment property and is distinct from the homeowner exclusion.

Home office deductions and depreciation recapture

Sellers who have claimed a home office deduction or depreciation on any portion of their primary residence may face depreciation recapture on the portion of the home that was treated as business property. This recapture is taxed as ordinary income under IRC §1250 rather than at capital gains rates, and it is not sheltered by the IRC §121 exclusion. Sellers who have claimed a home office for several years should flag this with their CPA before listing, as the recapture amount can be material depending on the square footage of the business-use area and how long depreciation was claimed.

Gain exceeding the exclusion ceiling

The exclusion limits are $250,000 (single) and $500,000 (MFJ). In the North Dallas market, where homes in Frisco, Prosper, and McKinney have appreciated substantially over the past decade, some sellers have gains that exceed these limits. The amount above the exclusion ceiling is taxable at the applicable long-term capital gains rate. A married couple with a $700,000 gain on their home would exclude $500,000 and owe federal tax on the remaining $200,000. At the 15% rate, that is $30,000 in federal capital gains tax. Planning for this scenario before closing, rather than discovering it afterward, makes the outcome far more manageable.

How does stepped-up basis work for inherited Texas homes?

One of the most favorable tax provisions available to homeowners is the stepped-up basis rule for inherited property under IRC §1014 and IRS Publication 551. When a property owner dies and the home passes to a beneficiary, the cost basis of the home is not the price the original owner paid decades ago. Instead, the basis is “stepped up” to the fair market value of the home at the date of the original owner’s death (IRC §1014). This reset often eliminates capital gains tax on inherited homes entirely, even if the original owner purchased the home for a fraction of its current value.

An example illustrates the impact clearly: a parent purchased a home in Dallas in 1985 for $95,000. At the time of the parent’s death in 2024, the home was worth $540,000. If the child inherits the home and sells it immediately for $540,000, the basis has stepped up to $540,000 and the capital gain is zero. No federal capital gains tax is owed on the entire appreciation that accumulated during the parent’s lifetime. Even if the child waits a year and sells for $565,000, only the $25,000 gain above the stepped-up value is taxable, not the $445,000 gain from the parent’s era of ownership.

This provision is a significant estate planning tool, and it has real implications for North Dallas families managing inherited properties. If you have inherited a home and are considering selling it, the first conversation to have is with an estate attorney or CPA who can confirm the fair market value at the date of inheritance, establish the correct cost basis, and calculate your actual exposure before you list.

For more on selling an inherited property in this market, see our guides at selling an inherited house in Plano and how to sell your parents’ house in Texas. Both walk through the practical steps from estate administration through closing.

What is the 3.8% net investment income surtax high-income sellers miss?

Beyond the standard capital gains rates, high-income sellers, including a number of North Dallas homeowners selling appreciated Frisco and Prosper properties, face an additional federal tax that operates as a surtax on top of the capital gains rate: the Net Investment Income Tax (NIIT) under Internal Revenue Code Section 1411 (IRC §1411). This 3.8% tax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds the following thresholds:

• $200,000 for single filers
• $250,000 for married couples filing jointly

Net investment income includes capital gains from the sale of property, to the extent those gains are not excluded under IRC §121. So the NIIT only applies to the taxable portion of your gain (the amount above the $250,000 or $500,000 exclusion), not the excluded amount. But for sellers with large gains above the exclusion limit or for sellers of investment property where the full gain is taxable, the NIIT adds a meaningful additional cost on top of the 15% or 20% capital gains rate.

In the top scenario, a high-income single seller with a taxable gain of $200,000 after the exclusion could face a combined federal rate of 23.8% (20% capital gains + 3.8% NIIT) on that gain, producing a tax bill of approximately $47,600 on that $200,000 before any state tax (Texas owes zero at the state level). This is the scenario where careful planning with a CPA well before closing produces the most meaningful savings, because there are legitimate strategies available to manage MAGI in the year of a sale.

“This is not transactional for us.”

That means when a client brings a complex tax situation to the conversation before listing, we take the time to understand it and connect them with the right professionals, rather than rushing to get a listing agreement signed. A seller who understands their tax position before they commit to a timeline makes better decisions at every stage of the process.

How do divorce, job relocation, and inherited property affect the exclusion?

Not every home sale fits the clean scenario of a married couple who lived in their home for seven years and are selling to move across town. Several common life events create partial exclusion scenarios under the IRS rules, and sellers in these situations need to know that a reduced exclusion is still better than no exclusion at all.

Divorce and the partial exclusion

When a married couple divorces and one spouse keeps the marital home, that spouse can claim the full $250,000 single-filer exclusion when they eventually sell, provided they meet the ownership and use test. Under IRC §121(d)(3), a spouse who was awarded the home in a divorce is credited with the other spouse’s period of ownership for purposes of meeting the two-year ownership requirement, even if they personally lived in the home for only a short time. This prevents a divorcing homeowner from losing the exclusion simply because the home was in the other spouse’s name for part of the ownership period. A CPA familiar with community property rules in Texas should review the specific situation before the sale is scheduled.

Job relocation: the partial exclusion for unforeseen circumstances

The IRC §121 exclusion allows a pro-rated (partial) exclusion when a seller must sell before meeting the two-year residency requirement due to a qualified reason, including a job change that requires relocating to a new work location that is at least 50 miles farther from the home than the previous workplace was (IRS Publication 523). The partial exclusion is calculated as a fraction of the full exclusion: the number of days you actually lived in the home as your primary residence divided by 730 (two years in days), multiplied by the full exclusion amount. For a single filer who lived in the home for 14 months (427 days) before a qualifying job relocation, the allowable exclusion would be $250,000 x (427/730) = approximately $146,200. That is significantly better than no exclusion at all.

Health and disability circumstances

The same partial exclusion framework applies when a seller must vacate and sell their primary residence before meeting the two-year requirement due to a documented health condition or disability that makes it medically necessary to live elsewhere (IRS Publication 523). The calculation method is the same as in the job relocation scenario. Sellers in this situation should work with their physician and CPA to document the medical necessity, as the IRS requires this substantiation for the partial exclusion to apply.

Inherited property: the stepped-up basis advantage

Inherited property is addressed in detail in the stepped-up basis section above. The key point worth repeating here is that the stepped-up basis rule under IRC §1014 is separate from the primary residence exclusion under IRC §121. An heir who inherits a home, lives in it as a primary residence for two years, and then sells it can potentially benefit from both provisions: the stepped-up basis that eliminates pre-inheritance appreciation, and the IRC §121 exclusion that shelters post-inheritance appreciation if the home was used as a primary residence. Confirm this with your CPA, as estate and tax law here can be complex.

For additional reading on selling inherited properties in the Dallas area, visit our guide to selling an inherited house in Plano or selling your parents’ house in Texas. For a broader picture of what your home is worth before making any selling decision, start at kaitlinlovern.com/what-is-my-home-worth-in-frisco-tx/.

Gain scenarios: what the math actually looks like

The following table applies the federal rules to three realistic scenarios for North Dallas sellers. These figures are illustrative and are not tax advice. Tax outcomes depend on your specific income, filing status, cost basis, and other factors your CPA will need to evaluate. Consult your tax professional before assuming any specific tax liability.

Figures are educational illustrations only. The 2026 federal long-term capital gains tax rate brackets used above are from IRS Revenue Procedure 2025-32. Individual tax outcomes depend on your total income, deductions, filing status, and other factors. Always consult a qualified CPA before closing. Texas imposes no state income or capital gains tax (Texas Comptroller of Public Accounts, 2026).

The most important takeaway from this table is the difference the IRC §121 exclusion makes. In the first two scenarios, a couple or individual with a large gain pays nothing or very little in federal tax because the exclusion absorbs most or all of the gain. In the third scenario, where the two-year requirement is not met, the full gain is exposed. That single distinction, whether a seller qualifies for the exclusion or not, is the most consequential tax fact about any home sale, and it is determined by dates that are already fixed before a seller ever contacts a real estate agent.

When the gain exceeds the exclusion ceiling

In North Dallas markets where homes have appreciated significantly over the past decade, some long-tenure sellers have gains that exceed the $500,000 MFJ ceiling. A married couple who purchased their Prosper home for $275,000 in 2014 and sell it for $950,000 in 2026 have a gross gain of $675,000. After the $500,000 MFJ exclusion, $175,000 remains taxable. At the 15% rate, that produces a federal capital gains tax bill of $26,250. If their combined income is high enough to trigger the NIIT (above $250,000 MFJ), an additional $6,650 in NIIT applies, for a total of $32,900. These are not small numbers, and they are exactly why planning this conversation with a CPA before listing is more valuable than planning it after the closing statement arrives (IRC §1411; IRS Revenue Procedure 2025-32).

Frequently asked questions