Here’s the good news: Texas capital gains tax doesn’t exist. Texas is one of nine states with no capital gains tax, which means when you sell stocks, real estate, or other investments at a profit, you won’t owe state income tax on those gains. But before you celebrate too hard, there’s a federal component to understand, and plenty of strategies to maximize your wealth in the Lone Star State.
If you’ve been worried about losing a chunk of your investment profits to state taxes, take a breath. We’re going to walk through exactly how capital gains work in Texas, what you actually owe to Uncle Sam, and how to keep more money in your pocket.
Why Texas Has No Capital Gains Tax
Texas is famously business-friendly, and the absence of a capital gains tax is a big part of that reputation. The state has no income tax at all—neither on wages nor on investment income. This policy has attracted wealthy investors, retirees, and entrepreneurs to Texas for decades.
The state funds itself through sales taxes, property taxes, and business taxes instead. So when you’re calculating what you’ll owe after selling that rental property or your stock portfolio, you only need to worry about federal taxes, not state ones. That’s a massive advantage compared to states like California (13.3% state tax on gains) or New York (up to 10.9%).
This is why so many high-net-worth individuals have relocated to Texas in recent years. The math is simple: no state capital gains tax means more of your money stays with you.
Understanding Federal Capital Gains Tax
While Texas won’t take a cut, the IRS absolutely will. Federal capital gains tax applies to the profit you make when you sell an investment. The rate depends on how long you held the asset and your income level.
Long-term capital gains (assets held over one year) are taxed at 0%, 15%, or 20%, depending on your tax bracket. Short-term capital gains (assets held one year or less) are taxed as ordinary income, which can be as high as 37%.
For most middle-class investors, the 15% long-term rate applies. This is significantly lower than ordinary income tax rates, which is why holding investments longer than a year can save you serious money.
Check out our Qualified Dividends and Capital Tax Worksheet to understand how these gains are calculated on your specific tax return.
Short-Term vs. Long-Term Capital Gains in Texas
The holding period matters enormously. Sell a stock after 11 months, and you’re paying ordinary income tax rates—potentially 22%, 24%, 32%, 35%, or even 37% federally. Hold it for 13 months, and you’re down to 15% (for most people).
In Texas, this distinction doesn’t create additional state tax burden, but it absolutely matters for your federal bill. A $50,000 gain taxed as short-term income could cost you $11,000 in federal tax. The same gain taxed as long-term capital gains? Around $7,500. That’s a $3,500 difference just by waiting a few months.
This is why timing is everything. If you’re thinking about selling an investment, consider whether you’re close to that one-year mark. Sometimes waiting is the smartest financial move you can make.
How to Minimize Capital Gains Tax in Texas
Since you’re not fighting state taxes in Texas, your focus should be on federal strategies. Here are the most effective approaches:
Hold investments longer than one year. This is the simplest strategy. Long-term gains are taxed at preferential rates—15% for most people, 0% for those in the lowest tax brackets, and 20% only for high earners.
Use tax-loss harvesting. Offset gains by selling losing investments. If you sold stocks for a $10,000 gain and have another investment down $10,000, sell the loser to cancel out the gain. You can carry forward unused losses indefinitely.
Donate appreciated securities to charity. Instead of selling a stock that’s gained $20,000 and paying tax on it, donate the shares directly to a charity. You get a tax deduction for the full current value, and the charity sells it tax-free. Everyone wins.
Bunch deductions strategically. If you’re close to itemizing deductions, bunching multiple years of charitable giving or other deductions into one year can help. Our Tax Strategist tool can help you model different scenarios.
Consider qualified small business stock. If you own stock in a qualified small business held for more than five years, you may exclude 50-100% of the gain. This is powerful for entrepreneurs.
Real Estate Capital Gains in Texas
Selling a home in Texas? Here’s where it gets interesting. You can exclude up to $250,000 in capital gains on your primary residence (or $500,000 if you’re married filing jointly), as long as you’ve owned and lived in the home for at least two of the last five years.
This exclusion is federal, not Texas-specific, but it’s enormous. Most homeowners never pay capital gains tax on their primary residence because of this rule. Sell your house for a $300,000 profit? You’d owe federal tax on only $50,000 (if single).
For investment properties or rental homes, you don’t get this exclusion. You’ll owe federal capital gains tax on the entire profit. However, you can use depreciation recapture to your advantage—or at least understand how it affects your bill. Depreciation you claimed while renting the property reduces your cost basis, which increases your taxable gain.
Texas property taxes are another consideration, though they’re not capital gains taxes. They’re assessed annually on the property’s value. Plan for those ongoing costs when evaluating real estate investments.
The Net Investment Income Tax (NIIT)
Here’s a tax that sneaks up on people: the Net Investment Income Tax. If your modified adjusted gross income (MAGI) exceeds $200,000 (single) or $250,000 (married filing jointly), you owe an additional 3.8% federal tax on investment income, including capital gains.
This isn’t a Texas tax, but it’s crucial to understand. A $100,000 capital gain could trigger an extra $3,800 in federal tax if you’re above the MAGI threshold. Find your AGI on your tax return and add back certain items to calculate your MAGI.
Planning around this threshold can save significant money. Sometimes it makes sense to spread gains across multiple years to stay below the NIIT threshold.
Capital Gains and Your Texas Residency Status
Texas residency matters if you’re relocating from another state. If you move to Texas and sell appreciated assets, you won’t owe Texas capital gains tax—because there is none. But you might owe tax to your previous state if you sold the assets while still technically a resident there.
The key is establishing Texas residency properly. This means getting a Texas driver’s license, registering your vehicle, establishing a home here, and documenting your intent to remain. Don’t just claim residency while maintaining a home in California—the IRS will notice, and you could owe back taxes plus penalties.
This is where working with a tax professional becomes invaluable. State residency disputes can get messy and expensive.
Investment Strategies Specific to Texas Residents
Because Texas has no capital gains tax, you can be more aggressive with your investment strategy compared to residents of high-tax states. You don’t need to hold winners as long to avoid state taxes. You can rebalance your portfolio more freely without worrying about state-level tax consequences.
This flexibility is worth money. If you’re in California and need to rebalance, you might hesitate because of state taxes. In Texas, you can optimize your portfolio without that friction.
Consider working with a financial advisor who understands Texas tax advantages. Use financial tools to boost your investment strategy and track your gains systematically.
Estate Planning and Capital Gains in Texas
Here’s something many Texas investors overlook: the step-up in basis at death. When you pass away, your heirs inherit your assets at their current fair market value, not your original cost basis. This eliminates capital gains tax on appreciation that occurred during your lifetime.
Example: You bought Apple stock for $1,000 in 2000. It’s worth $50,000 when you pass away. Your heirs inherit it at $50,000 cost basis. If they sell immediately, they owe zero capital gains tax on that $49,000 appreciation.
This is a federal rule, not Texas-specific, but it’s powerful for estate planning. It means you don’t need to rush to sell appreciated assets before you die to avoid taxes. In fact, holding them until death is often the smartest strategy.
Documenting Your Capital Gains and Losses
The IRS requires detailed records of your capital transactions. Keep purchase confirmations, sale confirmations, and any documentation of improvements to properties. For stocks and mutual funds, your brokerage provides cost basis information, but verify it’s accurate.
Texas doesn’t require state-level documentation (since there’s no state tax), but the IRS absolutely does. Sloppy record-keeping can trigger audits. Use a spreadsheet or investment tracking software to log every transaction, including the date purchased, date sold, purchase price, sale price, and any commissions or fees.
Learn more about how capital gains are specifically handled in Texas and ensure your records align with IRS requirements.
When to Consult a Tax Professional
You absolutely need professional help if you’re selling a business, have significant real estate holdings, or expect capital gains over $50,000 in a single year. The tax code is complex, and a mistake can be expensive.
A CPA or tax strategist can identify opportunities you’d miss on your own. They can model scenarios, plan timing, and structure transactions efficiently. Our Tax Strategist resource can help you think through your specific situation, but for complex scenarios, professional guidance is worth every penny.
Even if you usually do your own taxes, consider at least a consultation with a professional if you have capital gains. The cost ($200-500) is often recouped many times over in tax savings.
Frequently Asked Questions
Does Texas have a capital gains tax?
No. Texas has no state income tax of any kind, including no capital gains tax. You only owe federal capital gains tax on investment profits, not state tax. This is one of Texas’s major advantages for investors and retirees.
What’s the federal capital gains tax rate in Texas?
Federal rates are 0%, 15%, or 20% for long-term gains (assets held over one year), depending on your income level. Short-term gains are taxed as ordinary income, ranging from 10% to 37%. These rates apply to all Americans, including Texas residents.
How do I avoid capital gains tax on my home sale in Texas?
Use the primary residence exclusion: exclude up to $250,000 in gains (or $500,000 if married) if you’ve owned and lived in the home for at least two of the last five years. Most homeowners owe zero capital gains tax on their primary residence because of this rule.
Can I use capital losses to offset capital gains in Texas?
Yes. You can sell losing investments to offset gains. If you have more losses than gains, you can deduct up to $3,000 against ordinary income, with unused losses carrying forward indefinitely. This works the same in Texas as everywhere else.
What happens to capital gains if I move to Texas from another state?
Capital gains you realize after establishing Texas residency are not subject to Texas state tax. However, if you sell assets while still technically a resident of your previous state, you may owe that state’s capital gains tax. Establish residency properly to avoid complications.
Is the Net Investment Income Tax applied in Texas?
Yes. The 3.8% NIIT applies to Texas residents with high investment income, just like everyone else. It’s a federal tax, not a state tax. If your MAGI exceeds $200,000 (single) or $250,000 (married), you owe NIIT on investment gains.
Conclusion: Your Texas Capital Gains Tax Advantage
The bottom line: Texas residents have a genuine advantage when it comes to capital gains. No state tax means more of your investment profits stay in your pocket. But don’t let that advantage go to waste by ignoring federal taxes or missing planning opportunities.
Focus on holding investments longer than one year to qualify for preferential long-term rates. Use tax-loss harvesting to offset gains. Consider donating appreciated securities to charity. And if you’re selling a primary residence, remember that $250,000 (or $500,000) exclusion.
The absence of Texas capital gains tax doesn’t mean you’re off the hook—it just means you’re ahead of residents in other states. Use that advantage wisely, document everything, and consider professional guidance for significant transactions. That’s how you truly save money on capital gains.
Explore more tax strategy insights to build a comprehensive financial plan that works for your Texas lifestyle.
