By Mark Hewitt · Hewitt Group at Real Broker, LLC
Capital gains tax is the topic that Fort Worth home sellers most consistently either over-worry about or completely ignore — and both extremes lead to worse financial outcomes than a clear, accurate understanding of the rules produces. Sellers who over-worry sometimes delay selling a home that has appreciated significantly because they assume a tax bill that the primary residence exclusion would actually eliminate entirely. Sellers who ignore the issue sometimes close on a sale and discover only afterward that they owe the IRS more than they planned for — because the gain exceeded the exclusion, because the ownership or use requirements were not met, or because a prior exclusion claim within the past two years disqualifies them from claiming the full exclusion again. Mark Hewitt and the Hewitt Group at Real Broker, LLC discuss capital gains implications with every Fort Worth seller whose situation suggests this topic is relevant — not as tax advisors, which we are not, but as real estate professionals who ensure that every seller has the information they need to have the right conversation with a tax professional before the closing rather than after it.
What Capital Gains Tax Is and Why It Applies to Home Sales
Capital gains tax is a federal income tax levied on the profit from the sale of a capital asset — and a home is a capital asset under the Internal Revenue Code. When you sell a Fort Worth home for more than your adjusted cost basis in the property, the difference is a capital gain that is potentially subject to federal capital gains tax. Texas has no state income tax, which means there is no state-level capital gains tax on Fort Worth home sales — the only capital gains tax exposure for Fort Worth sellers is at the federal level.
The capital gain is calculated by subtracting the adjusted cost basis from the net sale price. The adjusted cost basis is the original purchase price plus the cost of capital improvements made during the ownership period minus any depreciation deductions taken — though depreciation is relevant primarily for investment properties rather than primary residences. Capital improvements that increase the basis include additions, renovations, major system replacements, and other investments that materially improve the property rather than simply maintaining it. Routine maintenance and repairs — painting, fixing a leaky faucet, replacing broken fixtures — do not increase the basis.
For a Fort Worth seller who purchased their home at $180,000 in 2014, added $30,000 in capital improvements during their ownership — a kitchen renovation, a bathroom update, and a fence replacement — and is selling today at $360,000, the calculation looks like this: adjusted cost basis of $210,000 (purchase price plus improvements), net sale price of approximately $336,000 after commission and other direct selling costs, producing a capital gain of approximately $126,000.
The Primary Residence Exclusion: The Most Valuable Tax Benefit in the Code for Fort Worth Homeowners
The Internal Revenue Code provides homeowners with one of the most generous tax exclusions available anywhere in the federal tax code — the primary residence capital gains exclusion under Section 121. This provision allows homeowners who meet the ownership and use requirements to exclude up to $250,000 of capital gain from federal income tax if they are filing as single, or up to $500,000 if they are married filing jointly.
For most Fort Worth sellers at current market prices, this exclusion eliminates the capital gains tax liability entirely. Consider the example above: the seller with a $126,000 capital gain and a $250,000 single-filer exclusion owes zero in capital gains tax on the sale — the entire gain falls within the exclusion amount. A married Fort Worth couple selling the same home with the same $126,000 gain has a $500,000 exclusion — again, zero capital gains tax owed.
Even Fort Worth sellers who have experienced more significant appreciation can often avoid capital gains tax entirely with the married filing jointly exclusion. A Fort Worth couple who purchased in 76109 for $250,000 in 2010 and is selling today for $600,000 — a gain of $350,000 before improvement adjustments — falls within the $500,000 married exclusion and owes zero capital gains tax. Adding $50,000 in documented capital improvements during the ownership period reduces the gain further to $300,000 — still well within the exclusion.
The Ownership and Use Requirements
To qualify for the full primary residence exclusion, the seller must have owned the home for at least two years AND used the home as their primary residence for at least two years out of the five years immediately preceding the sale date. Both the ownership test and the use test must be satisfied independently — owning the home for two years is not sufficient if the seller did not also live in it as their primary residence for two years, and using it as a primary residence for two years is not sufficient if the seller has not owned it for two years.
The two-year requirement does not need to be continuous — it is a cumulative two-year total within the five-year lookback window. A Fort Worth homeowner who lived in their home for eighteen months, rented it out for one year, and then returned to it as a primary residence for another eight months has accumulated twenty-six months of use as a primary residence within the relevant period — meeting the two-year threshold.
For Fort Worth buyers who are purchasing a home knowing they may not stay for two years — corporate relocation buyers, military families with uncertain assignment timelines, or buyers who anticipate life changes that could require a move — understanding the two-year threshold and its impact on capital gains eligibility should be part of the pre-purchase financial planning conversation. A buyer who purchases a Fort Worth home and sells it fourteen months later due to a job relocation has not met the two-year use requirement and cannot claim the full exclusion — though a partial exclusion may be available under the hardship provisions described below.
The Two-Year Prior Exclusion Rule
A less commonly known restriction on the primary residence exclusion is the requirement that the seller has not excluded gain from the sale of another home within the two years preceding the current sale. Fort Worth 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 prior exclusion date. This rule affects a relatively small proportion of Fort Worth sellers — primarily those who have had to sell and move more than once within a short timeframe — but it is a critical consideration for sellers who are in this situation and who might otherwise plan around an exclusion they are not eligible to claim.
Partial Exclusion for Sales That Do Not Meet the Full Requirements
Fort Worth sellers who do not meet the full ownership and use requirements — because they are selling within two years of purchase, because the home was not their primary residence for the full required period, or because they claimed another exclusion within the prior two years — may still qualify for a partial exclusion if the sale is the result of a qualifying hardship. The IRS recognizes specific hardship categories that allow a prorated exclusion — including a change in employment location that requires a move, health issues that necessitate a move to a different location, and certain other unforeseen circumstances defined in the treasury regulations.
The partial exclusion calculation is based on the ratio of the time the seller actually met the requirements to the full two-year requirement. A Fort Worth seller who lived in the home for fifteen months and is selling due to a qualifying employment relocation can claim 15/24 of the full exclusion — 62.5% of $250,000 for a single filer, or $156,250. If the capital gain is less than this prorated exclusion amount, the seller owes no capital gains tax. This partial exclusion provision is a meaningful protection for Fort Worth's significant relocation seller population — corporate transferees who purchased specifically to build Fort Worth roots and who are now being moved again within two years.
Capital Gains Tax Rates: What You Pay When You Exceed the Exclusion
For Fort Worth 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 the sale. Long-term capital gains — gains on assets held for more than one year — are taxed at preferential rates that are 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. An additional 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 rate on long-term capital gains to 23.8% for the highest-income sellers.
For a Fort Worth seller with a $100,000 gain above the exclusion amount and household income in the 15% long-term gains bracket, the federal capital gains tax on the excess gain is $15,000. For a seller in the 20% bracket with the same excess gain, the tax is $20,000 — plus $3,800 in net investment income tax if the income thresholds apply, for a total of $23,800. These are real, significant costs that a pre-sale conversation with a tax professional can help Fort Worth sellers plan for, minimize, and in some cases restructure through timing or other strategies.
Short-Term Capital Gains: The Cost of Selling Before Two Years
Fort Worth sellers who sell within one year of purchase — a less common scenario but one that occurs due to unforeseen circumstances, financial difficulties, or speculative purchases — are subject to short-term capital gains tax on any gain, which is taxed at ordinary income tax rates rather than the preferential long-term rates. Ordinary income tax rates run from 10% to 37% depending on the seller's total taxable income — significantly higher than the 0%, 15%, or 20% long-term rates. The financial cost of selling within one year rather than waiting to meet the two-year holding period for both the long-term rate and the primary residence exclusion can be substantial — a Fort Worth seller with a $100,000 gain who sells at eleven months rather than waiting until the one-year mark faces the difference between a 37% short-term rate (potentially $37,000 in federal tax) and potentially zero tax after meeting the primary residence exclusion requirements.
Investment Properties and the Depreciation Recapture Issue
Fort Worth sellers who own investment properties rather than primary residences face a different and more complex capital gains landscape than owner-occupant sellers. Investment property gains do not qualify for the primary residence exclusion and are fully subject to capital gains tax — at the long-term rate for properties held more than one year. Additionally, the depreciation deductions taken during the investment property's ownership period are subject to depreciation recapture tax at a flat 25% rate regardless of the seller's income bracket — a tax cost that is separate from and in addition to the capital gains tax on the appreciation gain.
The depreciation recapture calculation for a Fort Worth investment property follows this logic: if a property was purchased for $200,000 and held for ten years as a rental, the annual straight-line depreciation deduction is approximately $7,273 ($200,000 ÷ 27.5 years), and the accumulated depreciation over ten years is approximately $72,727. When the property is sold, this $72,727 in accumulated depreciation is recaptured at a 25% tax rate — producing a depreciation recapture tax of approximately $18,182 regardless of the seller's overall income level. This recapture tax is in addition to any capital gains tax on the appreciation above the adjusted basis, which has been reduced by the accumulated depreciation from $200,000 to approximately $127,273.
The 1031 Exchange: Deferring Capital Gains on Investment Properties
Fort Worth investment property sellers who want to defer their capital gains tax liability — avoiding the payment that would otherwise be due at sale — have access to the 1031 exchange provision of the Internal Revenue Code, which allows sellers of investment real estate to defer capital gains and depreciation recapture tax by reinvesting the sale proceeds into a like-kind replacement property within a specified timeline. The 1031 exchange requires identification of the replacement property within 45 days of the sale closing and completion of the exchange within 180 days — a timeline that requires advance planning to execute successfully.
The 1031 exchange is not a tax elimination — it is a deferral. The tax liability that would have been due on the current sale is rolled forward into the replacement property's basis, where it will eventually be recognized when the replacement property is sold without another 1031 exchange. But the ability to defer tax indefinitely through a series of 1031 exchanges — each time rolling the deferred liability forward into the next replacement property — is a powerful investment wealth-building tool that serious Fort Worth real estate investors should understand and utilize strategically.
How Mark Hewitt and the Hewitt Group Help Fort Worth Sellers Navigate Capital Gains
Mark Hewitt and the Hewitt Group at Real Broker, LLC are real estate professionals, not tax advisors — and the guidance we provide on capital gains is educational and directional rather than specific tax advice for your individual situation. What we do ensure is that every Fort Worth seller who might have a capital gains consideration — whether it is the primary residence exclusion qualification, an investment property sale, an inherited property, or a sale within the two-year threshold — has this conversation before the listing date rather than at the closing table when the decisions that affect the tax outcome can no longer be changed.
For every Fort Worth seller whose situation suggests a potential capital gains issue, the Hewitt Group provides a clear explanation of the relevant rules, an identification of the specific questions the seller needs to discuss with their CPA or tax attorney, and a referral to a qualified tax professional if the seller does not have one. This pre-sale tax planning coordination is one of the ways the Hewitt Group's representation goes beyond the transaction itself to protect the full financial outcome of every Fort Worth sale. Reach out today for a Fort Worth seller consultation that covers every dimension of your financial picture.
