Selling Rental Property in Texas: Capital Gains Tax Guide & Understanding House Sale Taxes

Before you sell your Texas rental property, you have to make sure that you fully understand the tax implications. This way, you won’t be at risk of completing a transaction that could leave you struggling with tax debt. Because Texas is known for having absolutely no state income tax, countless consumers flock here to take advantage of property sales that entail no taxation on the resulting income. Notwithstanding, landowners in Texas will still have to pay federal taxes on all capital gains in many instances. This is especially true when it comes to rental property sales. Following is everything that you want to know about tax implications when selling rental property in Texas.

What Are Capital Gains?

All property sales are treated just like all other forms of property that consumers hold for investment purposes. If you sell a home in Texas, than any profits generated beyond what was initially paid for the home is considered to be capital gain. Although the State of Texas won’t tax you on your profits or capital gains, the federal government will. Moreover, while there are special exemptions that can help limit taxation on these capital gains, these exemptions exist specifically for those who are selling their primary residences. As such, the amount of tax you pay on your sales profits is dependent upon how the property was used, how long you have owned the property, and whether or not you have actually spent any time using the home as a primary residence within recent years.

Qualifying For the Texas Personal Residence Exemption

If you used the home solely as a personal residence, you can earn up to $250k if filing with a single status. Joint filers can earn as much as $500k annually, including all capital gains. When selling your home and falling below these income caps, you will not have to pay any taxes for capital gains on your home sale. This exemption, however, can sometimes be applied to rental property owners if these individuals have spent time living in the home and have only been letting the property out for a very limited amount of time.

For instance, if you own a rental property and want to sell it, you can avoid capital gains taxes if you have lived in the home for at least two full years out of the past five years. It is additionally important to note that real estate investors are not allowed to use this exemption numerous times in a relatively close succession. There are, however, instances in which special circumstances could qualify sellers for partial capital gains exemptions, depending upon the circumstances and overall timing of the consecutive transactions in question.

Short And Long-Term Capital Gains

In an effort to keep short-term investors from capitalizing on the capital gains exemption, the IRS has made a clear distinction between short-term capital gains and long-term capital gains. For instance, you will need to have owned the home for a year or more to qualify for this exemption, even if you were living in the home throughout the entirety of the year. It is only after one full year of ownership that capital gains are deemed as being long-term and worthy of a tax exemption. Some short-term investors actually live in their properties while fixing them up in an effort to curb their living costs while investing in the improvement of their purchases. This stipulation exists to avoid rewarding investors for these practices given that the exemption is meant to provide relief to those who are simply seeking to maintain general living environments.

Capital Gains And The Sale Of A Duplex Or Other Multi-Unit Dwelling

There are several instances in which this exemption might apply to rental property owners. For instance, you may have purchased a duplex or townhouse with the intention of renting one portion of the building, while living in the other. In this case, all of the conditions for qualifying for the capital gains loan will be met, but the proceeds from the sale of both units will not be entirely tax exempt. Purchasing duplexes and other multi-unit buildings as a means of generating passive income is becoming an increasingly popular practice in the state of Texas. Not only are consumers able to avoid state property taxes, but they can additionally secure both primary residences and rental properties at an incredibly reasonable cost. Keep in mind, however, that only the proceeds from the portion of the home that were used as a primary residence will be tax exempt. For any portion of the property that was used as a rental, the capital gains will be calculated at the regular rate. This can be calculated by subtracting the square footage of the rental unit from the square footage of the entire building. The resulting percentage will determine the percent of the capital gains tax liability for the related sale. The tax rate for capital gains ranges from one percent to 20 percent, with the most likely rate being about 15 percent.

Capital Losses And Rental Properties

For both primary residences and and rental properties, there is always the likelihood of experiencing capital losses. Keep that in mind if you decide to sell your house. This is because not all property sales result in profits. Unexpected events can occur that depreciate the value of your property. Moreover, for landlords, the inability to find and maintain reliable tenants can result in more money paid out throughout the year, than more money coming in. In circumstances like these, tax laws favor sellers by providing them with a reasonable number of deductions and exemptions. Depreciation is applied over a period of 27.5 years. For every year that the property depreciates, approximately 3.6 percent can be applied as a deduction.

The Net Investment Income Tax

Rental property owners do not usually qualify for any portion of the capital gains exemption. They may also need to pay the net investment income tax. When this tax is applicable to sellers, they will need to pay 3.8 percent of the net income from their investments along with their capital gains taxes. Given that this combined amount can be quite considerable, sellers should be ware of these obligations before deciding how they will parcel out their monies following the close of these transactions.

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Jeffrey Fuentes
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These group of investors were really knowledgeable and helpful in getting our property sold with no hassle. Thank you Jill and Edgar for all your help in making this a quick and hassle free process. We appreciate you were always available to take our calls and that y’all were very professional.
Rebekah Hastings
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We sold our home with this company and were overall pleased with the process and outcome. The process can be a bit of an emotional roller-coaster (this is primarily due to the nature of the market, not a fault of the company), but Edgar and his team did their best to make it as straight-forward and stress-free as possible. Be prepared to show your home to potential investors and marketers, and be aware that you will probably not receive market value for your home. But if you need to sell your home quickly and don't have the available cash to cover repairs and closing costs, this is the best route to go. We closed within 30 days of having reached out to House Buyer San Antonio, and the funds were transferred to us within 24 hours of closing.
Jennifer McKenzie
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Edgar was very professional with great communication skills. He made the transaction run very smooth as it was a stressful time moving our mother out of her home and into a nursing home.
Maria Gonzalez
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This company made the process of selling my home an extremely pleasant experience. I was very impressed and satisfied with the whole process. Thank you, Maria Gonzalez
Rick Comacho
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Sal and the team were great. I was selling a house for my mom, and I was 1000 miles away. I made arrangements to meet several companies and Sal was the most prompt with returning calls and texts. Very important when you need to move quickly. He made an offer that worked and we got the house sold quickly. Selling a home is stressful and there was still stress, but it was mitigated by Sal's flexibility. God is good. Rick.
Ken Fries
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Right from the get go response time was awesome. I filled out the information on the web site and received a response from somebody with in hrs. Sal took over and has help get us through the pain of selling my childhood home with ease. Gave us a excellent offer. Would recommend him to all that are trying to sell a home.

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