Selling your home is exciting whether you’re upgrading, downsizing, or relocating but understanding the tax side of the sale helps you avoid surprises and keep more of your proceeds. Here’s what actually applies, with current 2026 numbers.
1. Understanding Capital Gains Tax
Capital gains tax applies to the profit from your sale the difference between your sale price and your adjusted cost basis (generally your original purchase price plus qualifying improvements).
Short-Term vs. Long-Term
- Short-term (owned one year or less): taxed at your ordinary income tax rate (10%–37%).
- Long-term (owned more than one year): taxed at the lower long-term capital gains rates below.
2026 Long-Term Capital Gains Rates
The rates themselves (0%, 15%, 20%) haven’t changed, but the income thresholds have shifted up with inflation:
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
|---|---|---|---|
| Single | Up to $49,450 | $49,451–$545,500 | Above $545,500 |
| Married Filing Jointly | Up to $98,900 | $98,901–$613,700 | Above $613,700 |
| Head of Household | Up to $66,200 | $66,201–$579,600 | Above $579,600 |
These thresholds apply to your total taxable income, not just the gain itself your gain stacks on top of your other income when determining which bracket applies.
The Net Investment Income Tax (NIIT) — Often Overlooked
If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), an additional 3.8% NIIT may apply to your investment income, including capital gains. This pushes the effective top federal rate on gains to 23.8% for higher earners. Unlike the capital gains brackets, these NIIT thresholds are not adjusted for inflation, so more sellers drift into them each year as home values rise.
2. The Primary Residence Exclusion
The most valuable tax benefit available to most home sellers:
- You must have owned and lived in the home as your primary residence for at least 2 of the last 5 years before the sale.
- The exclusion can be used once every 2 years.
- Single filers can exclude up to $250,000 of gain.
- Married couples filing jointly can exclude up to $500,000 of gain.
For most sellers, this exclusion eliminates capital gains tax on the sale entirely. If your gain exceeds the exclusion amount, only the excess is taxed at the applicable capital gains rate.
Haven’t hit the 2-year mark? You may still qualify for a partial exclusion if the sale is due to a qualifying reason a work-related move of 50+ miles, health reasons, or certain other unforeseen circumstances recognized by the IRS.
3. Special Considerations for Investment Properties
If you’re selling a home that’s been used as a rental or investment property, different rules apply:
- You won’t qualify for the primary residence exclusion unless you meet the 2-of-5-year use test.
- Depreciation recapture tax applies: any depreciation you claimed while renting the property reduces your cost basis, and the IRS “recaptures” that depreciation at sale, taxed at a maximum rate of 25%.
- Investment property sellers should consult a tax professional the numbers here get complicated quickly, and there may be strategies (like a 1031 exchange) worth exploring before you sell.
4. State Taxes in Texas
Texas has no state income tax, which means no state-level capital gains tax on your home sale. Only the federal rules above apply. This is a genuine advantage compared to many other states — but it doesn’t eliminate federal capital gains tax or the NIIT if they apply to your situation.
5. Selling Due to Divorce or Inheritance
Divorce
If you and your spouse are selling as part of a divorce settlement, you may still qualify for the capital gains exclusion if you meet the ownership and use tests — the details can get specific depending on timing and who retains ownership, so this is worth confirming with your attorney or tax professional directly.
Inheritance
Inherited property benefits from a stepped-up basis the property’s cost basis resets to its fair market value as of the date of the original owner’s death, rather than what they originally paid. This can significantly reduce or even eliminate taxable gain if you sell reasonably close to that value. See our full guide on what to do with an inherited house for more on navigating this process in Texas.
6. Deductions That Can Reduce Your Taxable Gain
- Selling costs — agent commissions, and other costs directly tied to the sale, can reduce your taxable gain.
- Qualifying home improvements — capital improvements that added value (not routine repairs or maintenance) can be added to your cost basis, lowering your taxable gain.
Keep records of major improvements as you make them this is much easier than trying to reconstruct receipts and costs years later at sale time.
7. How to Minimize Taxes When Selling
- Track your improvement costs as you go, so you have documentation ready at sale time.
- Confirm you qualify for the full exclusion before listing if you’re close to the 2-year mark, timing your sale even a few weeks later could make a meaningful tax difference.
- Consider your total income picture for the year, especially if you’re near a capital gains bracket threshold or the NIIT threshold timing a sale across tax years can sometimes matter.
8. Consult a Tax Professional
Every situation is different, and the rules above are general guidance, not personalized advice. A tax professional or CPA can confirm your specific exclusion eligibility, calculate your actual basis and gain, and help you plan the timing of your sale if it matters for your tax picture.
Selling and Want to Avoid Surprises?
Whatever your tax situation, our team can walk you through the sale process just remember to loop in a tax professional to confirm your specific numbers before you close.
