Sellers here often assume that because Texas has no state income tax, selling a house has no tax consequence. The state part is right. The federal part is not, and for anyone who has held a house through the last decade in Austin the numbers can be large enough to matter.
What follows is general information about how this works, not tax advice. The thresholds and rules are federal, they change, and your situation has details a blog post cannot see. Talk to a professional before you rely on any of it.
What is actually taxed
The gain, not the sale price. Broadly, your gain is what you sold for, less selling costs, less your adjusted basis in the property.
Basis starts with what you paid, plus certain purchase costs, and is then adjusted upward by capital improvements you made over the years. So the gain is not the difference between the two prices on the two closing statements. It is usually smaller, and how much smaller depends on records you may or may not have kept.
The principal residence exclusion
Federal law allows an eligible homeowner to exclude a substantial amount of gain on the sale of a main home, with a larger amount available to married couples filing jointly than to single filers.
Eligibility turns on ownership and use tests measured over a look-back period, generally requiring that the property was owned and used as a main home for a qualifying period, with limits on how frequently the exclusion can be claimed.
The specific figures and periods are set federally and have been adjusted over time, which is exactly why quoting them in an article is unhelpful. Confirm the current position with a tax professional or at the IRS directly.
The practical point for Austin sellers: houses bought here a decade ago and sold today can carry gains large enough that the exclusion does not cover all of it, even after the correction from the 2022 peak. That is a good problem and it is still worth planning for.
Keep the improvement records
This is the actionable part, and it is the one people wish they had known ten years earlier.
Capital improvements generally increase your basis and therefore reduce your taxable gain. Ordinary repairs and maintenance generally do not. The rough distinction is that an improvement adds value, extends the life of the property, or adapts it to a new use, while a repair keeps it in working order.
Things that commonly count as improvements: additions, a new roof, a replacement HVAC system, a kitchen or bathroom remodel, new windows, a pool, a deck, landscaping that is genuinely capital in nature, foundation work.
Things that generally do not: repainting, fixing a leak, servicing the HVAC, replacing a broken pane.
Keep receipts, invoices, and permits from the day you buy. Over fifteen years of ownership this can add up to a meaningful reduction in the gain, and reconstructing it afterwards from memory is not the same as having documentation.
Where it gets complicated
- The property was a rental for part of the time. Periods of non-qualified use and depreciation taken during the rental period affect what can be excluded. This is the single most common complication and it needs professional handling rather than a rule of thumb.
- You worked from home and claimed a deduction. Can affect the calculation.
- You inherited the property. Basis is generally determined differently for inherited property, frequently to the beneficiary's advantage.
- Divorce or a change in ownership structure. Its own set of rules.
- You are selling sooner than the tests require. Partial exclusions may be available for certain qualifying circumstances such as a work relocation or health reasons.
The Texas angle
What Texas genuinely gives you here is the absence of a state layer. In a state with an income tax, a large gain is taxed twice, federally and by the state. Here it is taxed once.
For someone who has held an appreciated Austin house for a long time, that is a real and substantial benefit at the point of sale, and it is a part of the no-income-tax trade that people rarely count when they are weighing the move in the first place.
Plan before you list, not after
Some options only exist in advance. If the property is an investment rather than a home, an exchange into another investment property has to be structured before closing. Timing a sale relative to the ownership and use tests can matter. So can which year the sale falls in.
None of that is available once the transaction has closed. A conversation with a tax professional while you are deciding whether to sell is worth considerably more than one afterwards.
What we do about it
We raise this early, because sellers who have owned a long time in Austin are frequently surprised by it, and we will tell you plainly that the answer comes from your accountant rather than from us. What we can do is get you the numbers the accountant will ask for: the purchase details, the selling costs, and a clear estimate of where the sale lands.