Texas is known for its favorable tax environment. One key benefit is the absence of a state-level capital gains tax. This makes Texas attractive to investors, homeowners, and business owners. However, federal capital gains taxes still apply.
Federal Capital Gains Taxes
Capital gains are taxed by the federal government in two ways:
- Short-term capital gains apply to assets held for one year or less. They are taxed at your regular income rate.
- Long-term capital gains apply to assets held for more than one year. They are taxed at 0%, 15%, or 20%, depending on income.
High earners may also face a 3.8% Net Investment Income Tax. This applies to gains, dividends, and other investment income.
Exclusion for a Primary Residence
Selling your main home may allow you to avoid some taxes. Single taxpayers can exclude up to $250,000 in gains. Married couples can exclude up to $500,000.
To qualify, you must meet two conditions:
- You lived in the home for at least two of the past five years.
- You haven’t claimed the exclusion on another home in the past two years.
1031 Exchange for Real Estate for Capital Gains Tax
Real estate investors can use a 1031 exchange to defer taxes. This lets you reinvest in another property without paying tax right away.
To qualify:
- Identify a replacement property within 45 days.
- Complete the new purchase within 180 days.
This is a common tool for building a property portfolio.
Investing in Opportunity Zones in Capital Gains Tax
Opportunity Zones offer special tax benefits. These zones are in lower-income areas that need investment.
If you reinvest gains into a Qualified Opportunity Fund, you can defer taxes until 2026. If you hold the investment for 10 years, further gains may be tax-free.
Tax-Loss Harvesting
Tax-loss harvesting helps offset capital gains. Sell losing investments to realize a loss. This loss can reduce your overall tax bill.
This strategy works well during market downturns or portfolio rebalancing.
Use of Tax-Advantaged Accounts
Certain investment accounts provide tax benefits:
- Traditional IRAs and 401(k)s: Taxes are deferred until withdrawal.
- Roth IRAs: Withdrawals, including gains, are tax-free if qualified.
- Health Savings Accounts (HSAs): Gains are tax-free if used for medical expenses.
These accounts help you build wealth with fewer tax impacts.
Final Thoughts
Texas doesn’t charge capital gains tax, but the federal government does. Planning is key to reducing your tax bill. Use strategies like:
- Holding investments longer than one year.
- Claiming the primary residence exclusion.
- Using 1031 exchanges.
- Investing in Opportunity Zones.
- Harvesting losses.
- Investing through tax-advantaged accounts.
Always consult a tax advisor. They can help tailor strategies to your financial goals.
