Tax Deductions to Take When Selling a Home in Texas
The money the IRS lets you keep — if you know where to look
April 7, 2026 | Raquel Refuerzo | realtyraquel.com
You did the hard part. You bought a home in Houston, you built equity, and now you're ready to sell. The problem most sellers run into? They walk away from money the IRS was willing to let them keep, simply because they didn't know where to look.
Texas has no state income tax, which already puts you ahead. But federal tax law on home sales is a different story, and it rewards sellers who plan ahead. Whether you're selling a starter home in Spring Branch or a longtime family property in Memorial Villages, understanding your tax deductions when selling a home in Texas can add tens of thousands of dollars back into your pocket. Here's what applies to most Houston-area sellers in 2026, and why so many leave it on the table.
What Is the Capital Gains Exclusion for Texas Home Sellers?
This is the biggest tax break in residential real estate, and most sellers don't fully use it.
The $250,000 / $500,000 Rule
Under Section 121 of the IRS tax code, you can exclude up to $250,000 of profit from your home sale if you're a single filer, or up to $500,000 if you're married and filing jointly. That profit is excluded from your taxable income entirely.
Who Qualifies?
To qualify, you must have owned the home and used it as your primary residence for at least 24 months out of the last 60 months before the sale. The two years don't have to be continuous. You also can't have used this exclusion on another home within the past two years.
What Texas Sellers Should Know
Since Texas has no state capital gains tax, only the federal exclusion applies. For many Houston sellers, the Section 121 exclusion wipes out the entire tax bill. If your gain exceeds the exclusion limit, you pay federal capital gains tax only on the amount above it.
How Do Home Improvements Reduce Your Capital Gains?
People think selling expenses are just a cost of doing business. In reality, they're one of the most effective tools for lowering your taxable gain.
Understanding Your Adjusted Basis
Your taxable gain is calculated as your sale price minus your adjusted basis. Your adjusted basis starts with what you originally paid for the home. Every qualifying capital improvement you made over the years gets added to that number. A higher basis means a smaller gain, which means a lower tax bill.
What Counts as a Capital Improvement?
According to IRS Publication 523, capital improvements are expenses that materially add to the value of your home, significantly extend its useful life, or adapt it to new uses. Think kitchen remodels, room additions, new roofing, HVAC replacement, or major landscaping. Routine repairs don't qualify. Painting a room or fixing a leaky faucet won't move the needle.
The Record-Keeping Reality
This deduction only works if you have documentation. Receipts, contractor invoices, and permits from work done years ago all count. Start building that file now, before you list.
Can You Deduct Selling Costs When You Sell Your Home in Texas?
Yes, and most sellers underestimate how much this matters.
Selling Expenses That Reduce Your Gain
Costs directly tied to the sale of your home reduce your net proceeds, which lowers your capital gain. According to tax guidance from Nolo, qualifying selling expenses include real estate commissions, attorney fees, title search fees, transfer taxes, and certain closing costs. On a Houston home sale in the $400,000 to $600,000 range, these costs often total $25,000 to $40,000 or more.
What Doesn't Qualify
Costs for general upkeep before the sale, such as lawn care, house cleaning, or cosmetic touch-ups, don't reduce your taxable gain. Mortgage payoff amounts and moving expenses also don't count.
The Commission Factor
In Texas, seller-paid real estate commissions are typically one of the largest line items at closing. That entire commission reduces your amount realized, which directly lowers your capital gain. It's not a deduction in the traditional sense. It's a subtraction from what the IRS counts as your profit.
Does Texas Give You Any Additional Tax Advantages When Selling?
Texas already gives you a structural advantage most sellers don't fully appreciate.
No State Income Tax on Home Sale Profits
Texas is one of a small number of states with no individual state income tax. That means no state-level capital gains tax applies to your home sale profits. You only deal with the federal side. For sellers in states like California or New York, this difference alone can represent tens of thousands of dollars.
The Homestead Exemption Advantage
While the Texas homestead exemption primarily benefits you as a property owner during your years in the home, it reflects a broader framework that protects residential property owners. If you've held your home for several years in a strong Houston market, the combination of no state income tax and the federal Section 121 exclusion often means you walk away owing nothing.
What About Partial Exclusions, Inherited Homes, and Rental Conversions?
Not every sale fits neatly into the standard rules. A few situations deserve attention.
Selling Before Two Years
If you sell before hitting the two-year residency mark, you don't automatically lose everything. The IRS allows a partial exclusion if the sale is due to a qualifying reason, such as a job change, a health issue, or an unforeseen circumstance. The partial exclusion is proportional to how long you actually lived in the home.
Inherited Properties
When you inherit a home, your cost basis typically steps up to the fair market value of the property at the time of the original owner's death. In a rising market like Houston, this step-up can significantly reduce or eliminate any taxable gain when you eventually sell.
Homes Converted from Rentals
If you turned a former rental property into your primary residence before selling it, different rules apply. Any depreciation you claimed during the rental period cannot be excluded and may be subject to recapture taxes. This is an area where a CPA's guidance makes a real difference before you list.
What Records Should Houston Sellers Keep Before Listing?
The deductions above only deliver results if you can substantiate them.
Documents to Gather Now
Pull together your original settlement statement from when you purchased the home, receipts and invoices for all capital improvements, your property tax statements, and your most recent closing disclosure from any refinancing. Your home valuation is a good starting point for understanding what your equity position looks like before you factor in taxes.
Work with a CPA Before You Sell
A real estate agent helps you price, market, and close your home. A CPA or tax advisor helps you keep more of what you earn from that sale. The best outcomes come from both working together early in the process. Tax planning before you list is far more effective than scrambling after closing.
The Seller's Guide as a Starting Point
Knowing your numbers before you list also makes you a more confident seller. The Seller's Guide at realtyraquel.com walks through the full process, from preparation to closing, so you go in with a clear picture of what to expect.
Most sellers focus on what they'll net from the sale. The smarter move is understanding what the IRS lets you keep before you ever get to that number. In Houston, where appreciation has been strong and most long-term homeowners have significant equity, the difference between a well-planned sale and an uninformed one is real money. Know your basis. Document your improvements. Understand the exclusion. Then sell with confidence.
Ready to make your move in Houston? Reach out to Raquel Refuerzo — she's helped hundreds of buyers and sellers in this market approach their transactions with clarity and confidence.
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