Do you have to pay capital gains tax on real estate in Texas?

You sometimes have to pay capital gains tax when you sell real estate at a profit. How much tax you pay depends on how long you held the property, how you bought it and your tax bracket.

Short term vs. long-term holding

Capital gains taxes are lower for long-term holding. Federal real estate law also doesn’t charge capital gains tax up to a certain income level for those who held long-term. As for short-term property sales, all income levels usually have to pay this tax. In 2023, a married couple who files jointly doesn’t have to pay capital gains tax if their income is $89,250 or less. You must hold an asset for at least one year for the lower tax rate. The tax rate for short-term holding ranges from 10%–37%. In comparison, the highest tax that you could pay from a long-term hold is 20%.

Tax-deferred funds

One strategy for avoiding capital gains tax on real estate is to use the funds from your IRA or 401(k) to buy the property. When you deposit your investment profits into your investment account, they could accumulate tax-free. IRA contributions sometimes give you tax deductions too.

1031 exchange

The 1031 exchange is a popular real estate investment strategy for reducing taxes. You could use the profit from selling a property to buy a new real estate of equal or greater value. The IRS won’t charge you taxes on depreciation deductions when you do a 1031 exchange.

Primary residence

If the property that you’re selling was your primary residence, then you don’t need to pay capital gains taxes on up to $500,000 as a joint filer and $250,000 as a single filer. Some people may qualify for a depreciation deduction tax exemption. You must live in the home for at least two of the last five years. Taking a primary residence exemption within the past two years would disqualify you.

The potential tax benefits of investing in real estate attract many investors. Some knowledge of the tax code helps you get the best return from your investments.