Capital Gains Taxes When Selling a Home in Texas

By Stephen Harris | July 10, 2026

When you’re calculating what you’ll walk away with from a home sale, capital gains tax is the one cost most Killeen sellers don’t have to worry about — but the ones who do worry about it are usually worrying without enough information.

Here’s a clear breakdown of how capital gains tax works on a Texas home sale, who pays nothing, who pays something, and what military sellers need to know.

Texas Has No State Capital Gains Tax

Texas has no state income tax, which means no state capital gains tax on home sales. Whatever profit you make on the sale of your Killeen home is not subject to any Texas state tax. This is one of the genuine financial advantages of selling in Texas compared to high-tax states like California or New York, where state capital gains tax can add an additional 9–13% on top of federal taxes.

What you do have to consider is the federal capital gains tax — and for most primary homeowners, even that is zero.

The Section 121 Exclusion: How Most Sellers Pay Nothing

The federal tax code’s Section 121 exclusion is the provision that lets most homeowners sell their primary residence without paying any capital gains tax. Here’s how it works:

If you’ve owned your home and used it as your primary residence for at least 2 of the last 5 years, you can exclude up to $250,000 in profit from your taxable income if you’re a single filer — or up to $500,000 if you’re married filing jointly. The 2-year residency doesn’t have to be continuous; it can be cumulative over the 5-year window.

On a $225,000 Killeen home, the taxable gain is typically far below the $250,000 single-filer threshold — especially factoring in capital improvements and selling costs that reduce your gain. Most Killeen sellers have a taxable gain of $30,000–$80,000 on a typical home in the current market, well under the exclusion limit. The result: zero capital gains tax owed.

To qualify for the full exclusion, you must:

• Have owned the home for at least 2 years
• Have lived in it as your primary residence for at least 2 of the last 5 years
• Not have used the Section 121 exclusion on another home sale within the last 2 years

If you meet all three conditions, your profit up to the exclusion limit is completely tax-free — you don’t even report it on your return if the gain is fully excluded.

How to Calculate Your Capital Gain

Capital gain is not simply the sale price minus what you paid. The IRS calculation is:

Sale price
− Selling costs (agent commission, title fees, closing costs you paid)
− Adjusted cost basis (original purchase price + capital improvements)
= Capital gain

Your adjusted cost basis increases with capital improvements you’ve made to the home — additions, a new roof, HVAC replacement, kitchen or bath remodel, fencing, permanent landscaping. Routine maintenance and repairs (painting, appliance repair, caulking) don’t count. Keeping records of capital improvements throughout your ownership period is important — those receipts directly reduce your taxable gain.

Example: You bought your Killeen home in 2019 for $195,000. You added a covered patio for $12,000 and replaced the HVAC for $8,500. Your adjusted cost basis is $215,500. You sell in 2026 for $235,000, paying $14,000 in commissions and closing costs. Your capital gain is: $235,000 − $14,000 − $215,500 = $5,500. You’re single, you’ve lived there 5 years — the $5,500 gain is fully excluded. You owe nothing.

When You Do Owe Capital Gains Tax

The scenarios where sellers actually owe capital gains tax on a Texas home sale:

Your profit exceeds the exclusion limit. If you’re a single filer and your capital gain exceeds $250,000 — or $500,000 for married filers — the amount above the limit is taxable. In Killeen’s price ranges, exceeding the exclusion limit is uncommon, but it can happen on homes with very low original purchase prices and significant appreciation over many years.

You haven’t met the 2-year residency requirement. If you’ve owned the home less than 2 years, or lived in it for less than 2 of the last 5 years, you may not qualify for the full exclusion. A partial exclusion may be available if you’re selling for a qualifying hardship reason. If no exclusion applies, the gain is taxable — at long-term rates (0%, 15%, or 20% depending on your income) if you owned the home more than a year, or at short-term rates (your ordinary income bracket) if you owned it less than a year.

You claimed a home office deduction or had a rental portion. If you deducted home office expenses or rented out part of your home, the depreciation you claimed over the years comes back as “depreciation recapture” — taxed at up to 25% — even if you otherwise qualify for the Section 121 exclusion. This is a situation where a tax professional’s input before you close is worth the cost.

Partial Exclusion for Sellers Who Don’t Meet the 2-Year Test

If you haven’t met the full 2-year ownership and residency requirement, you may still qualify for a partial exclusion if the reason you’re selling qualifies as a hardship under IRS rules:

• Change of place of employment
• Health reasons
• “Unforeseen circumstances” — which the IRS defines broadly to include divorce, death of a spouse, multiple births from a single pregnancy, job loss, and certain other situations

The partial exclusion is calculated as a fraction: the number of months you actually lived in the home as your primary residence, divided by 24 months, multiplied by the full exclusion amount. If you lived there 12 months and then had to sell due to a job change, your exclusion is 50% of the standard limit — $125,000 single, $250,000 married.

What Military Sellers at Fort Cavazos Need to Know

Active duty military members get a meaningful extension to the standard rules. Under the Military Family Tax Relief Act, military homeowners can suspend the 5-year lookback period for up to 10 years during qualifying military service away from the home. This means you can qualify for the full Section 121 exclusion as long as you lived in the home for 2 out of the last 15 years — rather than the standard 5-year window.

This matters enormously for Fort Cavazos soldiers who bought a home in Killeen, were deployed or stationed elsewhere for several years, and are now selling on PCS orders. The standard 2-of-5-year test might disqualify them — the military extension keeps them eligible.

If you’re selling on PCS orders and aren’t sure whether you meet the residency requirement, talk to a tax professional before closing. The military extension is real and significant, but the IRS rules around it have specific requirements.

This Is Tax Guidance, Not Tax Advice

Every seller’s situation is different — your gain amount, your residency timeline, your filing status, whether you had a rental portion or home office, and your overall income all affect what you owe. This post gives you the framework to understand the rules and know the right questions to ask. Before you close, especially if your gain is significant or your residency situation is complicated, consult a CPA or tax professional who can give you advice specific to your situation.

What I can do as your listing agent is help you structure the sale — timing, pricing, and net proceeds — with full information about what you’ll actually walk away with. (For a full breakdown of net proceeds after all costs, see How Much Will You Net Selling Your Home in Killeen, TX?)

Frequently Asked Questions

Do you pay capital gains tax when you sell a house in Texas?

Texas has no state income tax, so no state capital gains tax applies. At the federal level, most primary homeowners qualify for the Section 121 exclusion — up to $250,000 tax-free for single filers, $500,000 for married filers — and pay nothing. The exceptions: profit exceeds the exclusion limit, the 2-year residency test isn’t met, or there’s depreciation recapture from a home office or rental use.

What is the Section 121 exclusion for home sales?

A federal tax provision allowing homeowners to exclude up to $250,000 (single) or $500,000 (married) of capital gain from selling a primary residence. Requirements: owned for 2+ years, lived in it as primary residence for 2 of the last 5 years, and haven’t used the exclusion on another home sale within the last 2 years. The gain up to the limit is completely tax-free.

What if I don’t meet the 2-year requirement — do I still owe taxes?

Possibly, but you may qualify for a partial exclusion if you’re selling due to a job change, health reason, or unforeseen circumstance. The partial exclusion is prorated based on how many months you actually lived there. Without any exclusion, long-term gains are taxed at 0–20% depending on income; short-term gains are taxed as ordinary income.

How do I calculate capital gains on a home sale in Texas?

Capital gain = sale price, minus selling costs (commission, closing fees), minus your adjusted cost basis (purchase price + capital improvements). If the result is under your exclusion limit and you qualify, you owe nothing. If it exceeds the limit, the excess is taxable at long-term capital gains rates.

Do military sellers get any special capital gains tax treatment in Texas?

Yes — under the Military Family Tax Relief Act, active duty military can suspend the 5-year lookback period for up to 10 years during qualifying service. This means they qualify for the full Section 121 exclusion if they lived in the home for 2 of the last 15 years. Critical for Fort Cavazos PCS sellers who may not meet the standard 5-year window due to deployment or reassignment.