How Capital Gains Taxes Work In Texas

Understanding Capital Gains Taxes

Capital gains taxes are applied to the profit made from selling an investment asset, such as stocks, mutual funds, real estate, boats, or vehicles. These taxes are influenced by several factors, including your state of residence, filing status, the type of asset sold, and the duration of ownership. Here’s an in-depth look at capital gains taxes in Texas:

Texas Tax Overview

Texas stands out as one of the eight states that do not impose personal income tax or capital gains tax. This group also includes Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, and Wyoming. Consequently, Texans primarily need to focus on federal capital gains taxes.

Federal Capital Gains Tax Rates

Capital gains taxes are categorized into short-term and long-term rates:

• Short-Term Capital Gains: Assets held for one year or less are subject to short-term capital gains taxes, which range from 10% to 37%, based on your income level.
• Long-Term Capital Gains: Assets held for more than one year benefit from lower tax rates of 0%, 15%, or 20%, depending on your income and filing status.

For the 2024 filing year, the federal capital gains tax rates are as follows:

Strategies to Minimize Federal Capital Gains Tax

Even though Texas has no state capital gains tax, federal capital gains tax still applies. Here are several strategies to minimize it:

• Utilize Tax-Advantaged Accounts: Invest through accounts like 401(k) plans, Roth IRAs, and HSAs to gain significant tax benefits, potentially exempting gains from capital gains taxes.
• Primary Residence Exemption: Homeowners can exclude up to $250,000 ($500,000 for married couples) of the profit from the sale of their primary residence from capital gains tax if they meet the ownership and use tests.
• Section 1031 Exchange: Defer capital gains taxes by reinvesting proceeds from the sale of an investment property into another like-kind property.
• Strategic Timing of Asset Sales: Timing the sale of assets during years of lower income can reduce your capital gains tax liability.
• Hold Onto Assets: Keeping an asset for more than one year can shift the tax rate from short-term to the more favorable long-term capital gains rate.

The Role of Tax Planning

Effective tax planning is crucial when managing your investments and capital gains. By understanding both federal and state tax laws, you can make more informed decisions, avoid unexpected liabilities, and work towards maximizing your profits.

Read more: The Crucial Role of Tax Planning Prior to Retirement

Calculating Capital Gains Tax

To calculate your federal capital gains tax, subtract the asset’s cost basis (purchase price plus related fees) from the selling price to determine the total gain. Apply the appropriate tax rate based on whether the gain is short-term or long-term.

Inherited Property and Capital Gains Tax

Inherited property typically benefits from a "step-up" in basis, meaning the asset’s basis is adjusted to its fair market value at the time of the original owner’s death, potentially reducing capital gains tax liability upon sale.

Capital Gains Tax on Real Estate Sales

The process for calculating capital gains tax on real estate follows the same principle as other assets. However, opportunities like the 1031 exchange can defer taxes, and consulting with a tax advisor can ensure compliance and optimization of your investment strategy.

Conclusion

While Texas residents enjoy the absence of state capital gains tax, federal taxes still apply. By leveraging strategies such as long-term holdings, primary residence exemptions, 1031 exchanges, and tax-advantaged accounts, you can effectively manage and minimize your federal capital gains tax burden.

For comprehensive advice tailored to your situation, consult with a CFP® professional at Haywood Wealth.

Our wealth management advisors specialize in retirement planning, investment management, and tax planning, ensuring your financial strategies align with your goals.

Schedule a consultation today to optimize your wealth management and investment strategy.