Texas capital gains tax: what real estate investors actually pay

Texas has no state capital gains tax for individuals

Texas does not tax capital gains at the state level because it has no state individual income tax at all. Whether you sell a rental house in Dallas, a duplex in San Antonio, or shares of stock, the State of Texas takes nothing from the gain.

This is more durable than a policy choice. In 2019, Texas voters approved Proposition 4, a constitutional amendment that prohibits the state from ever imposing an individual income tax without another constitutional amendment. That makes Texas one of a handful of states — alongside Florida, Tennessee, and Wyoming — where individual capital gains are structurally protected from state taxation. Our overview of states without capital gains tax compares the full list.

The practical effect for investors is straightforward: when you model an exit on a Texas property held in your personal name, the only income-based taxes in the waterfall are federal. There is no state return to file on the gain and no state withholding on the sale.

Federal capital gains tax always applies

Living or investing in Texas does not reduce your federal capital gains tax by a single dollar. The IRS taxes gains the same whether the property sits in Houston or Honolulu, and the rate depends primarily on how long you held the asset.

Long-term capital gains — assets held more than one year — are taxed at 0%, 15%, or 20% depending on your taxable income. The income thresholds for each bracket are adjusted annually for inflation, so check the current figures at irs.gov before you model an exit. Most active investors land in the 15% bracket, with higher earners paying 20%.

Short-term capital gains — assets held one year or less — are taxed as ordinary income at rates currently as high as 37%. For a quick-turn sale, that difference between short-term and long-term treatment can be the single largest line item in the deal, which is why hold-period planning matters even in a zero-state-tax state.

Two federal add-ons investors often miss: NIIT and depreciation recapture

The headline 0/15/20 rates understate what many landlords actually pay, because two additional federal layers frequently apply to investment property sales.

First, the net investment income tax (NIIT) adds 3.8% on net investment income — including capital gains and rental income — for taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly). A 15% long-term gain can effectively become 18.8%, and a 20% gain 23.8%.

Second, depreciation recapture applies when you sell a rental you have been depreciating. The portion of your gain attributable to depreciation deductions — called unrecaptured Section 1250 gain — is taxed at a maximum rate of 25% rather than the lower long-term rates. On a property held for a decade, recapture is often a five-figure item, so build it into your sale analysis rather than discovering it at tax time.

Flip profits are usually not capital gains at all

If you flip houses in Texas, your profits are generally taxed as ordinary income, not capital gains. The IRS treats properties bought with the intent to renovate and resell as inventory held by a dealer, which means dealer profits are taxed at ordinary rates and may also be subject to self-employment tax.

That distinction changes the math on a flip more than any state-level rule. A $60,000 profit on a six-month flip can face a materially higher combined federal rate than the same gain on a rental held for two years. Texas still helps — a flipper in Austin keeps the state-tax savings that a flipper in California does not — but the federal character of the income is set by intent and holding pattern, not geography.

Investors running both strategies often separate them: flips in one entity generating ordinary income, and long-term rentals in another building equity taxed at long-term rates on exit. If you are financing the flip side of that model, Texas fix and flip loans fund the purchase and up to 100% of the rehab budget on business-purpose terms.

The Texas franchise tax: what LLC investors need to know

While individuals pay no Texas tax on gains, taxable entities — including most LLCs, corporations, and limited partnerships — are subject to the Texas franchise tax, sometimes called the margin tax. It is a tax on an entity’s taxable margin, not a capital gains tax, but it can touch real estate profits that flow through an entity.

Most small investor LLCs owe nothing. Entities with annualized total revenue at or below the no-tax-due threshold — approximately $2.47 million for recent report years, per the Texas Comptroller — owe no franchise tax, though they still have annual filing obligations such as the Public Information Report. Above the threshold, the tax generally runs 0.375% of taxable margin for retail and wholesale businesses and 0.75% for most others, including real estate operations.

Texas law also provides a passive entity exemption, and notably, capital gains from the sale of real property can count as qualifying passive income — but ordinary rental income does not. That means an entity that primarily collects rent will usually not qualify as passive, while certain entities that mainly realize sale gains might. The rules are technical, thresholds change between report years, so verify current figures at comptroller.texas.gov and confirm your entity’s status with a Texas tax professional.

For most investors closing one to a few DSCR loans in an LLC, the franchise tax is a compliance footnote rather than a real cost — annual revenue rarely approaches the threshold until the portfolio is substantial.

Property taxes are the real Texas tax cost

The tax Texas investors actually feel is the property tax bill. Because the state levies no income tax, local governments lean heavily on property taxes, and Texas effective rates have historically ranked among the highest in the nation. There is no state property tax — rates are set and collected locally by counties, cities, school districts, and special districts, with the system overseen by the Texas Comptroller.

For a rental investor, that changes underwriting more than any capital gains discussion. A Texas property can carry an annual tax bill roughly double what a comparable property would owe in a lower-rate state, which directly reduces net operating income and the debt service coverage ratio a lender will calculate. Always underwrite with the post-sale assessed value, not the seller’s current bill — Texas appraisal districts commonly reassess after a transaction.

Higher-value markets like Austin, Dallas, and Houston compound the effect, since larger assessed values meet high local rates. Investors buying at those price points should also review Texas jumbo loan requirements, because financing structure and tax escrow both scale with the purchase price.

The full tax picture for a Texas real estate investor

Here is how the layers stack up when you sell or hold investment real estate in Texas. Note which taxes apply to everyone, which apply only to entities, and which are recurring rather than transaction-based.

Common strategies Texas investors use to manage federal gains

Since the only capital gains tax in Texas is federal, planning centers on federal tools. These strategies are widely used, but each has strict requirements — treat this as a checklist for a conversation with your CPA, not personalized tax advice. No loan product eliminates or defers taxes.

• Hold past one year: crossing the long-term threshold moves gains from ordinary rates (up to 37%) into the 0/15/20 brackets.
• Section 1031 exchange: defer federal gain by exchanging into like-kind investment property within the IRS deadlines — 45 days to identify, 180 days to close.
• Primary residence exclusion: Section 121 excludes up to $250,000 of gain ($500,000 married filing jointly) on a home you owned and used as your principal residence for at least 2 of the last 5 years.
• Harvest losses: capital losses from other investments can offset gains realized in the same tax year.
• Track basis carefully: capital improvements, acquisition costs, and selling expenses all raise basis and shrink the taxable gain.
• Model recapture before selling: sometimes refinancing and holding produces a better after-tax outcome than a sale that triggers recapture plus NIIT.

Rolling gains into the next Texas property

The zero-state-tax environment makes Texas one of the most efficient states in the country for compounding real estate equity — more of every exit survives to fund the next acquisition. The financing side can be just as friction-free.

Business-purpose lenders qualify Texas rentals on the property’s cash flow rather than your tax returns, which matters for investors whose returns show heavy depreciation and 1031 activity. A DSCR loan in Texas underwrites to the rent-to-payment ratio, so a well-performing property qualifies on its own numbers. Just remember the property tax discussion above: Texas tax bills are a major input to the DSCR calculation, so run the numbers with a realistic post-sale assessment using a DSCR calculator before you commit.

For value-add investors, the same logic applies on the acquisition side — short-term renovation financing lets you keep more of your untaxed-at-the-state-level gains liquid instead of tying them up in all-cash purchases.

Where Mortava fits

Mortava is a direct lender for business-purpose investor loans in all 50 states, including Texas. DSCR rental loans on 1–4 unit properties go up to 85% LTV on purchases with 30- and 40-year fixed and interest-only options, loan amounts from $100K to $3.5M, and the ability to close in an LLC or corporation — the entity structures many Texas investors already use. Because DSCR qualification is based on property cash flow, no personal income documentation is required.

For flippers, Mortava’s fix and flip program funds up to 95% of total cost with 100% of the rehab budget, term sheets in as little as 2 hours, and draws within 24 hours. Quotes start with a soft credit inquiry — no hard pull — and indicative term sheets are generated through AI review with manual approval after submission. Nothing here is tax advice or a commitment to lend; loan terms depend on full underwriting.

Frequently asked questions

• Texas Comptroller — Franchise Tax
• Texas Comptroller — Property Tax Assistance
• IRS — Topic No. 409, Capital Gains and Losses
• IRS — Topic No. 559, Net Investment Income Tax
• IRS — Topic No. 701, Sale of Your Home
• IRS — Like-Kind Exchanges, Real Estate Tax Tips