By Mark Hewitt · Hewitt Group at Real Broker, LLC
Capital gains tax is one of the most important financial topics that Arlington home sellers need to understand before listing their property — and one of the most consistently misunderstood. Sellers who assume they owe nothing because they have heard Texas has no income tax sometimes discover a federal capital gains liability they were not expecting. Sellers who assume they owe a large tax on their appreciation sometimes delay a sale unnecessarily because the primary residence exclusion would have eliminated their liability entirely. And sellers who own investment properties in Arlington's northeast zip codes sometimes close a sale without understanding the depreciation recapture tax that follows them into the next tax year. Mark Hewitt and the Hewitt Group at Real Broker, LLC address capital gains with every Arlington seller whose situation suggests this topic is relevant — ensuring that the right pre-sale tax conversation happens before the closing rather than after it when the decisions that affect the outcome can no longer be changed.
The Texas No-Income-Tax Advantage and What It Does Not Cover
Texas has no state income tax — a fact that is central to the financial case for relocating to Texas that the Hewitt Group covers extensively in the relocation guides published elsewhere on this site. For capital gains purposes, the absence of Texas state income tax means that Arlington sellers owe no state-level capital gains tax on the sale of their home — zero, regardless of the gain amount. This is a genuine financial advantage relative to sellers in California, where the state income tax applies to capital gains at rates up to 13.3%, or in New York, where state and city income taxes can push the combined state and local capital gains rate above 14%.
What the Texas no-income-tax advantage does not cover is the federal capital gains tax — which applies to all Americans regardless of which state they live in. Federal capital gains tax on home sales is the primary and in most cases the only capital gains tax exposure for Arlington sellers, and understanding the federal rules in detail is the preparation that prevents unpleasant surprises.
What Capital Gains Tax Is and How It Applies to Arlington Home Sales
Capital gains tax is a federal income tax levied on the profit from the sale of a capital asset. Your Arlington home is a capital asset under the Internal Revenue Code, and when you sell it for more than your adjusted cost basis, the difference is a capital gain that is potentially subject to federal tax. Texas has no equivalent state tax, so the federal calculation is the only one that matters for Arlington sellers.
The capital gain is calculated by subtracting the adjusted cost basis from the net sale proceeds. The adjusted cost basis is the original purchase price plus the cost of capital improvements made during the ownership period. Capital improvements are investments that materially improve the property and extend its useful life — additions, renovations, major system replacements like HVAC or roof, and similar expenditures. Routine maintenance and repairs do not increase the basis.
For an Arlington seller who purchased their home in 76015 for $185,000 in 2012, invested $35,000 in capital improvements over the ownership period, and is selling today for $355,000, the calculation looks like this. Adjusted cost basis equals $220,000 ($185,000 purchase price plus $35,000 in improvements). Net sale proceeds after direct selling costs — primarily the real estate commission — equal approximately $331,000 on a $355,000 gross sale price at a 5.5% commission structure. The capital gain equals approximately $111,000 ($331,000 minus $220,000). This $111,000 gain is then evaluated against the primary residence exclusion to determine whether any federal tax is owed.
The Primary Residence Exclusion: Why Most Arlington Sellers Owe Zero Capital Gains Tax
The Internal Revenue Code Section 121 primary residence exclusion is the most valuable tax benefit available to American homeowners — and the provision that eliminates capital gains liability for the overwhelming majority of Arlington owner-occupant sellers at current market prices. The exclusion allows qualifying homeowners to exclude up to $250,000 of capital gain from federal income tax if filing as single, or up to $500,000 if married filing jointly.
In the example above — the Arlington seller with a $111,000 capital gain — the single-filer exclusion of $250,000 eliminates the entire gain from federal taxation. Zero capital gains tax is owed. For a married couple with the same gain, the $500,000 exclusion provides even more comfortable protection. The capital gains planning conversation for this seller is a confirmation exercise — verifying that the ownership and use requirements are satisfied — rather than a tax minimization challenge.
The same arithmetic applies to the vast majority of Arlington owner-occupant sellers at current price points. Arlington's median home values have increased meaningfully over the past decade, but the gains most Arlington sellers have accumulated — even long-term owners in the most appreciating zip codes — typically fall within the exclusion thresholds that eliminate federal liability entirely.
The Ownership and Use Requirements: What Arlington Sellers Must Verify
To qualify for the full primary residence exclusion, the seller must satisfy two independent tests. First, the ownership test requires that the seller has owned the home for at least two of the five years immediately preceding the sale date. Second, the use test requires that the seller has used the home as their primary residence for at least two of the five years immediately preceding the sale date. Both tests must be independently satisfied — meeting one does not satisfy the other.
The two-year requirement does not need to be continuous. An Arlington homeowner who lived in the home for fourteen months, rented it out for ten months due to a temporary job assignment in another city, and then returned to it as their primary residence for twelve months has accumulated twenty-six months of qualifying use within the relevant five-year window — meeting the two-year threshold. What matters is the cumulative total of qualifying use within the lookback period, not whether the use was uninterrupted.
For Arlington buyers who are purchasing knowing they may not stay for two years — first-time buyers in a transitional life stage, corporate relocation buyers who may be transferred again, or buyers in the northeast entertainment district zip codes where higher turnover is common — understanding the two-year threshold before purchase is important financial planning. A buyer who purchases and sells within fourteen months without a qualifying hardship has not met the use test and cannot claim the full exclusion, potentially exposing gains to federal tax at ordinary or capital gains rates depending on the holding period.
Arlington-Specific Ownership and Use Scenarios
Arlington's diverse seller population creates several specific ownership and use scenarios that the Hewitt Group addresses with clients regularly. The investor-turned-owner-occupant scenario arises when an Arlington seller has owned a rental property for multiple years and converted it to their primary residence before selling. The ownership test is typically satisfied by the total ownership period, but the use test requires two years of primary residence use specifically — meaning that a seller who rented a property for four years and then lived in it as their primary residence for only eighteen months before selling has not satisfied the two-year use test despite owning the property for more than five years.
The second-home-converted-to-primary-residence scenario is similar — an Arlington seller who used a property as a vacation home or second home before converting it to their primary residence can only count the years of primary residence use toward the two-year use test, not the years of second-home use. Arlington sellers in either of these situations should verify their specific qualification with a tax professional before assuming the full exclusion applies.
The Prior Exclusion Rule: The Two-Year Waiting Period
A restriction on the primary residence exclusion that affects a smaller but important segment of Arlington sellers is the requirement that the seller has not excluded gain from another home sale within the two years preceding the current sale. Arlington sellers who recently sold another primary residence and claimed the exclusion on that sale cannot claim the full exclusion again until two years have passed from the date of the prior exclusion.
This rule is most relevant for Arlington sellers who have moved multiple times in a short period — perhaps selling a previous home within the past two years as part of a life change or relocation before purchasing their current Arlington property. Sellers in this situation should verify the date of their prior exclusion claim before assuming the current sale qualifies for the full exclusion.
Partial Exclusion for Arlington Sellers Who Do Not Meet the Full Requirements
Arlington sellers who do not satisfy the full ownership and use requirements may still qualify for a partial exclusion if the sale is the result of a qualifying hardship. The IRS recognizes three primary hardship categories that allow a prorated exclusion. First is a change in employment location — a job transfer, a new job in a different city, or a self-employed business relocation that requires the seller to move. Second is a health-related circumstance — a medical condition that requires the seller or a member of their household to relocate to receive care or to live in a different environment. Third is an unforeseen circumstance — a catch-all category that includes events like divorce, natural disaster, death of a co-owner, or multiple births that make the current home inadequate.
The partial exclusion is calculated as the ratio of the months the seller actually met the requirements to the full twenty-four months required. An Arlington seller who has lived in their home for fifteen months and is selling due to a qualifying job relocation can claim 15/24 of the full exclusion — 62.5% of $250,000 for a single filer ($156,250) or 62.5% of $500,000 for a married filer ($312,500). Most Arlington sellers who are selling due to a qualifying hardship before the two-year mark will have gains well below these prorated thresholds and will owe zero capital gains tax despite not having met the full requirements.
This partial exclusion provision is particularly relevant for Arlington's significant relocation buyer population — corporate transferees and employees of the major companies with DFW operations who purchased specifically with Arlington in mind and who are now being transferred again. Mark Hewitt and the Hewitt Group at Real Broker, LLC specifically discuss this provision with every Arlington seller who may be selling before the two-year mark.
Arlington's Long-Term Homeowners: When the Gain Approaches the Exclusion Threshold
Arlington sellers who purchased their homes in the 1990s or early 2000s — when Arlington's residential market was significantly less expensive than today — have accumulated gains that in some cases approach the exclusion thresholds, particularly for single filers. An Arlington seller who purchased in 76016 for $110,000 in 1999 and is selling today for $370,000 has a gross gain of $260,000 — $10,000 above the single-filer exclusion before capital improvements are accounted for. With even $20,000 in documented improvements over twenty-five years of ownership — modest amounts for a home of this age — the adjusted gain falls to $240,000, comfortably within the exclusion.
For long-term Arlington sellers who are concerned about approaching the exclusion threshold, the capital improvement documentation exercise is the most accessible and most immediately valuable planning step. Every dollar of documented capital improvement increases the adjusted cost basis and reduces the taxable gain. Arlington homeowners who have lived in their properties for fifteen to twenty-five years have almost certainly made improvements that collectively add up to significant basis increases — but those improvements only reduce the gain if they are documented with contractor invoices, receipts, or other contemporaneous records.
Arlington sellers with long ownership periods should specifically compile their improvement documentation before meeting with the Hewitt Group for the initial seller consultation — bringing whatever records they have for kitchen renovations, bathroom updates, HVAC system replacements, roof replacements, additions, pool installations, fencing, and other capital expenditures. The Hewitt Group's pre-listing consultation includes a capital improvement inventory exercise that helps sellers identify and document the improvements that increase their basis and reduce their taxable gain.
Long-Term Capital Gains Rates: What Arlington Sellers Pay When They Exceed the Exclusion
For Arlington sellers whose capital gain exceeds the applicable exclusion amount — or who do not qualify for the exclusion at all — the federal capital gains tax rate depends on the seller's total taxable income for the year of sale. Long-term capital gains, which apply to assets held for more than one year, are taxed at preferential rates that are significantly lower than the ordinary income tax rates that apply to wages and other income.
For 2026, the federal long-term capital gains rates are 0% for taxpayers with taxable income below approximately $47,025 for single filers and $94,050 for married filing jointly filers, 15% for taxpayers with taxable income between these thresholds and approximately $518,900 for single filers and $583,750 for married filers, and 20% for taxpayers with taxable income above these thresholds. The 3.8% net investment income tax applies to capital gains for taxpayers with modified adjusted gross income above $200,000 for single filers and $250,000 for married filers — pushing the effective top federal rate on long-term capital gains to 23.8% for the highest-income sellers.
An Arlington seller with $50,000 of gain above the exclusion amount and household income placing them in the 15% long-term gains bracket owes $7,500 in federal capital gains tax on the excess. At the 20% rate plus the net investment income tax, the same $50,000 excess produces $11,900 in federal tax. These are real costs that warrant a pre-sale planning conversation with a tax professional — particularly for higher-income Arlington sellers whose total income for the year of the sale, combined with the capital gain, pushes them into higher rate brackets.
Short-term capital gains — on properties held for one year or less — are taxed at ordinary income rates of 10% to 37%. The financial penalty for selling within one year rather than waiting for long-term treatment is substantial and in most cases makes waiting the financially sound decision for Arlington sellers who have a choice about the timing of their sale.
Arlington Investment Properties: Depreciation Recapture and the Full Tax Picture
Arlington's northeast zip codes — particularly 76010, 76011, and 76006 near the entertainment and sports district — have a significant investor ownership presence, and the capital gains implications for investor sellers in these zip codes are meaningfully more complex than for owner-occupant sellers. Investment property gains do not qualify for the primary residence exclusion and are fully subject to federal capital gains tax at the applicable long-term rate. Additionally, the depreciation deductions taken during the ownership period are subject to depreciation recapture tax at a flat 25% rate — a separate and additional federal tax cost on top of the appreciation gain tax.
The depreciation recapture calculation for an Arlington investment property works as follows. Residential rental property is depreciated over 27.5 years using the straight-line method under federal tax law. A property purchased for $180,000 generates an annual depreciation deduction of approximately $6,545 ($180,000 divided by 27.5 years). Over eight years of ownership, the accumulated depreciation is approximately $52,364. This accumulated depreciation reduces the adjusted cost basis from $180,000 to approximately $127,636 — meaning that the taxable gain on a sale at $275,000 is approximately $147,364 rather than the apparent appreciation of $95,000.
Of this $147,364 total gain, approximately $52,364 is classified as depreciation recapture and taxed at the flat 25% rate — producing a depreciation recapture tax of approximately $13,091. The remaining $95,000 in appreciation gain is subject to long-term capital gains tax at the applicable rate — potentially $14,250 at 15% or $19,000 at 20%. The total federal tax exposure for this Arlington investor before net investment income tax is approximately $27,341 to $32,091 — a figure that significantly affects the after-tax net proceeds calculation and that requires advance tax planning for any investor who is evaluating whether to sell or hold.
The 1031 Exchange Option for Arlington Investment Property Sellers
Arlington investment property sellers who want to defer their capital gains tax and depreciation recapture tax liabilities have access to the Internal Revenue Code Section 1031 like-kind exchange — one of the most powerful tax deferral mechanisms available in the federal tax code. A properly structured 1031 exchange allows the seller to defer all capital gains and depreciation recapture taxes indefinitely by reinvesting the sale proceeds into a qualifying replacement property within the specified timeline.
The mechanics of a 1031 exchange require that the replacement property be identified within 45 days of the sale closing and that the exchange be completed — the replacement property purchased — within 180 days of the sale closing. The exchange must be facilitated by a qualified intermediary who holds the proceeds between the relinquished property sale and the replacement property acquisition — the seller cannot receive or control the funds during the exchange period without disqualifying the exchange.
For an Arlington investment property seller with $32,000 in combined capital gains and depreciation recapture tax liability, the 1031 exchange allows this $32,000 to remain invested in replacement real estate rather than paid to the IRS — a meaningful advantage that compounds over time if subsequent 1031 exchanges continue to defer the accumulated liability. The deferred tax is not forgiven — it accumulates in the basis of the replacement property and is eventually recognized when the property is sold without another 1031 exchange — but the ability to defer indefinitely through a series of exchanges is a powerful investment wealth-building tool.
Arlington investment property sellers considering a 1031 exchange should begin the planning process well before the listing date — identifying likely replacement property targets, selecting a qualified intermediary, and understanding the timeline and procedural requirements that govern the exchange. Attempting to structure a 1031 exchange after a property is already under contract or after the sale has closed is not possible under the rules. Mark Hewitt and the Hewitt Group at Real Broker, LLC connect Arlington investment property sellers with qualified 1031 intermediaries and experienced tax professionals as a standard part of investment property seller representation.
Estate Sales and Inherited Arlington Properties
Arlington properties that pass through an estate — inherited by heirs from a deceased owner — receive a step-up in cost basis to the fair market value at the date of the decedent's death. This step-up eliminates any capital gains tax on the appreciation that occurred during the decedent's ownership period, providing heirs who sell promptly after inheritance with a tax-free or near-tax-free proceeds outcome regardless of how much the property appreciated during the original owner's lifetime.
An Arlington heir who inherits a property that the original owner purchased for $75,000 in 1988 and that is now worth $310,000 has a stepped-up basis of $310,000. Selling the property at $310,000 produces zero capital gains — the $235,000 in appreciation accumulated over the original owner's thirty-six years of ownership is entirely sheltered by the step-up. Even if the market has moved slightly between the date of death and the eventual sale, the gain above the stepped-up basis is typically modest and falls well within the available exclusion if the heir has lived in the property as their primary residence.
Estate sellers in Arlington should verify the specific stepped-up basis with the estate attorney or CPA handling the estate administration — because the step-up is calculated based on the fair market value at the specific date of death, which may require a formal appraisal to establish accurately for tax purposes.
How Mark Hewitt and the Hewitt Group Protect Arlington Sellers' Capital Gains Interests
Mark Hewitt and the Hewitt Group at Real Broker, LLC are real estate professionals, not tax advisors — and the capital gains guidance we provide is educational and directional rather than specific tax advice for any individual situation. What we ensure for every Arlington seller is that the capital gains conversation happens before the closing rather than after it, that every seller who might have a capital gains exposure has the information they need to consult with a qualified CPA or tax attorney before the sale is finalized, and that the specific questions each seller needs to address with their tax professional are clearly identified rather than left to chance.
For Arlington sellers whose situation is straightforward — owner-occupants with gains well within the exclusion, satisfied ownership and use requirements, and no complicating factors — the Hewitt Group's capital gains assessment provides the confidence that zero tax is owed and the understanding of why. For Arlington sellers with more complex situations — investment property sales, gains approaching exclusion thresholds, sales within two years, or estate-related transactions — the Hewitt Group provides the directional guidance and the professional referrals that ensure these situations are handled correctly. Reach out today for an Arlington seller consultation that covers the complete financial picture of your sale.
