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Published on: 02/14/2022

Does Texas Have Capital Gains Tax?

Does Texas have capital gains tax? Because capital gains tax is considered an income tax, states that don’t have a personal income tax also don’t have capital gains income tax –– Texas just happens to be one of those states. That said, you may still have to pay capital gains tax at the federal level.

While this concept may seem a bit confusing, the wealth managers from Avidian Wealth Solutions are here to answer your questions about the taxes on capital gains in Texas on both the state and federal level.

What are capital gains taxes?

Capital gains taxes are taxes that you pay on the profit from the sale of an investment asset. These investments include everything from stocks and mutual funds to physical property including boats, vehicles, and real estate. There are two main types of capital gains: long-term capital gains and short-term capital gains.

Long-term capital gains taxes are applied to the sale of assets that have been held for a year or longer. According to federal policy, how much you pay in long-term capital gains tax will depend on your tax bracket/filing status and will be either 0%, 15%, or 20%. On the other hand, short-term capital gains tax is applied to assets that have been held for less than a year and are taxed as per your regular income tax bracket.

As far as capital gains tax on the state level goes, most states will tax capital gains the same way they’d tax your ordinary income meaning that it will vary by state.

What is the capital gains tax rate in Texas?

As previously mentioned, the capital gains tax rate in Texas mimics that of its income tax — or lack thereof. Since the profits made on the sale of investable assets are considered income, you would not have to pay any capital gains tax to the state of Texas.

Texas is also one of only seven states that does not impose any type of inheritance tax. This means that the heirs of individuals who pass away while living in this state may be able to receive the full value of their inheritance without the burden of an additional tax bill. 

However, those inheriting real estate located in other states may still need to pay capital gains taxes if the seller was not a resident of Texas at the time of sale. Additionally, businesses are subject to franchise taxes, which are separate from income and capital gains taxes but can also impact profitability.

Does Texas have a capital gains tax on real estate?

Texas is a great place to invest in real estate. It has a diverse range of housing markets, neighborhoods, and varied commercial interests, making it easy for investors to find the perfect property for their needs. However, before you purchase any properties, it’s important to understand Texas’ capital gains tax on real estate.

The capital gains laws for selling real estate in Texas are the same that apply to any capital gains earned from Texas residents. Because there is no income tax or capital gains tax in Texas, the state does not impose any additional taxes on the sale of real estate and does not impose state taxes on selling land in texas either. 

This, however, does not mean that you are exempt from federal taxes in Texas.

Continue reading: Is Real Estate Still a Good Investment?

Taxes on selling a house in Texas

So, do I have to pay taxes when I sell my home in Texas? Yes, if you’ve owned your home or property in Texas for over a year and earn a profit from the sale of it, then you will be required to pay federal taxes on the gains. However, the amount you will be required to pay is dependent on the length of time you’ve owned the property.

For homes or property sold within the first year of ownership, the taxes owed will depend on the seller’s income tax bracket as these are considered short-term capital gains. For properties sold after one year of ownership, the taxes owed will be based on filing status and are typically much lower than short-term capital gains tax. For some sellers, the amount of taxes owed on long-term capital gains may even end up being zero.

Who is exempt from paying capital gains tax on real estate sales?

According to the IRS, if the home is the seller’s primary place of residence and they have lived there for at least two years, then sellers who file individually are allowed to make up to $250,000 in profits without paying capital gains tax. Similarly, sellers who file as a married couple and meet the same criteria listed above are able to make up to $500,000 off the sale of their home before being required to pay capital gains tax. This exemption is available to most Texas homeowners and can help make selling your home in the Lone Star state a much more attractive option.*

However, you may still need to pay capital gains taxes to another state if you have purchased property in that state and plan to sell it while living in Texas. If you are selling a business property, you may also be subject to franchise taxes. Due to these state by state variances in tax law, it’s important to research the laws in any other state where you have purchased real estate — or better yet, get a financial advisor to assist you.

*It’s important to note that this rate applies only to profits earned during the sale of an asset, not any other type of income such as rental income or interest earned from investments associated with real estate investments. 

How do I avoid capital gains tax in Texas?

If you’re looking to avoid paying capital gains taxes in Texas, it won’t be too isn’t hard to do considering the state doesn’t have any income tax and therefore doesn’t have any capital gains income tax. However, we’re assuming that if you’re asking this question, you’d also like to know how to avoid them at the federal level too. While federal capital gains taxes are unavoidable, there are some tips that you can use to minimize your tax burden.

1. Hold on to assets for longer than a year

The taxes for long-term capital gains tend to be far less than that of short-term capital gains. Keep in mind that this piece of advice may not apply to you if you are a high-net-worth individual as your income tax bracket may be higher than the cap on long-term capital gains tax. To figure out which strategy is best for you, speak with a financial advisor who specializes in high-net-worth financial planning.

2. Make use of tax-advantaged accounts

Examples of tax-advantaged accounts include accounts such as health savings accounts (HSA), donor-advised funds (DAF), 529 college savings accounts (Read More: Are 529 Contributions Tax Deductible?), 401(k) plans, and IRAs. Capital gains tax is not applied on investments sold within these accounts, but you will have to pay taxes either before or after adding/removing qualified distributions from the account depending on the type of account.

3. Look into tax-loss harvesting

Tax-loss harvesting is one of many tax reduction strategies specifically used for high-net-worth individuals and families. It involves reconciling investment losses and offsetting capital gains. In other words, it typically involves selling low-performing assets to offset gains made from selling high-performing assets.

Keep reading: How does tax loss harvesting work?

4. Consider hiring a financial advisor

The best way to optimize your tax strategy is to hire a fiduciary financial advisor. Together, you can create a strategy to minimize your taxes in several areas of your financial plan including your investments. Not to mention, the benefits you gain by having a trusted partner to seek advice from before selling your assets.

Why a fiduciary vs. broker? Fiduciary financial advisors are legally obligated to act in your best interest. Therefore, you can always rest assured that you’re receiving the best advice for you and your unique financial goals. 

Tax reduction strategies for selling property

1. Net capital gains and losses

If you own two or more properties in Texas, you may be able to deduct your losses from one property against your gains from another when calculating your capital gains taxes due on those properties. This is known as “netting” and can be used to offset your net long-term capital gains against any short-term capital gains, reducing your tax liability overall if you have multiple profitable investments in Texas real estate.

2. Use the 1031 Exchange

One of the best tax reduction strategies for selling property is the use of a 1031 Exchange. A 1031 Exchange allows investors to defer capital gains taxes on their real estate investments by reinvesting the proceeds into another “like-kind” investment property. 

This strategy can be used multiple times, allowing investors to continue deferring their capital gains indefinitely and potentially avoiding them altogether if they never cash out of their investments. 

In order for an exchange to qualify as a 1031 Exchange, certain criteria must be met such as having similar properties in terms of ownership type and location, and completing the process within 180 days of selling your original property.

3. Make use of available deductions

In Texas, homeowners may be eligible for certain tax deductions when they sell their property, such as mortgage interest or real estate taxes paid during the period of ownership. These deductions may help to reduce your overall tax liability if you are selling a property in the state. 

4. Consider a partial sale of the property

If you plan on keeping some ownership of your property, consider a “partial sale” of the home. A partial sale involves selling only a portion of your ownership in the property, allowing you to defer capital gains taxes until that portion is sold off completely. This strategy can be especially beneficial for investors who are expecting long-term appreciation or income from their real estate investments as it allows them to realize some profits without incurring any tax liability. 

5. Incorporate your property into your estate plan

If you are in a high-income bracket and are looking for ways to avoid paying taxes on large capital gains, you may want to consider gifting your property or setting up a family trust. 

Gifting real estate can be complicated and should be discussed with an experienced real estate tax strategist, but it is a way to transfer ownership without incurring the tax burden associated with selling the property. Keep in mind that the beneficiary may still be subject to taxes, and that you may be responsible for any gift taxes if the value of the property exceeds the annual exclusion amount.

Continue reading: How to avoid inheritance tax in Texas

Who is exempt from capital gains tax on real estate?

When it comes time to file your taxes for a given year, you must include Form 1040 Schedule D along with any applicable supporting documents so that the IRS can accurately calculate your total capital gains taxes due from sale of assets within Texas borders. 

You will also need to provide details about each transaction that sold including date of purchase/sale, cost basis (original purchase price plus improvements), sales price, and any deductions taken related to those transactions in order for the IRS to properly assess your liability for capital gains taxes in Texas.

In addition to reporting profits gained through sale of real estate in Texas, there are criteria you must meet in order qualify for specific tax exemptions under state law. The exemptions and criteria are as follows:

  • If you lived at least two out of five years leading up to the sale of a residence located in Texas then you may qualify for an exemption up to $250k ($500k if filing jointly) from federal taxation on those profits.
  • If you owned and lived within the same single family residence located within Texas borders for at least five consecutive years prior to its sale then no tax will be due on those earnings (up to $500k if filing jointly).
  • If you are inheriting property, then you may also qualify for an exemption of up to $1 million from federal taxation on its sale. In order to qualify for this exemption, the inherited property must have been deeded in the deceased’s name for at least two years prior to their passing, with the surviving heirs living in the same home for a minimum of one year.

As always, consulting with an experienced financial advisor who understands high-net-worth financial planning strategies and can help you navigate market highs and lows is the best way to stay on the advantageous path with your investments. 

Avidian Wealth Solutions offers efficient high-net-worth tax planning in Houston

Hopefully by now, you’re able to answer the question “does Texas have capital gains tax?” While the state itself doesn’t have capital gains income tax, you are still responsible for paying capital gains tax on the federal level. When it comes to paying Texas capital gains tax on real estate, taxpayers are required to pay taxes on the sale of any residential or commercial property located within Texas borders. 

If you’re looking to upgrade your tax strategies in the new year or have additional questions about investing in real estate vs. stocks, Avidian Wealth Solutions is here to provide you with high-net-worth income tax strategies aimed to help you meet your specific financial goals. Whether you need advice on risk management, tax planning, or investment management in Houston, Avidian’s multidisciplinary team of highly credentialed experts is prepared to meet your financial needs.

To learn more about how we can help with your tax strategy, schedule a meeting with us today!

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