Tax Consequences of Selling Austin Investment Property
Austin's real estate appreciation means many investors who bought in 2015–2020 have built substantial equity — and face substantial tax bills when they sell. Understanding capital gains tax, depreciation recapture, and tax deferral strategies before you sell is essential.
Capital Gains Tax on Austin Rental Property
When you sell an investment property, the gain is taxed as capital gains.
Calculating Your Gain
Adjusted Basis = Purchase price + improvements - depreciation claimed
Capital Gain = Sale price - selling costs - adjusted basis
Example:
- Purchased Austin rental: $280,000 (2016)
- Improvements: $25,000
- Depreciation claimed (8 years × $8,000/year): $64,000
- Selling costs (agent commission, title, etc.): $28,500
- Sale price (2025): $550,000
Adjusted Basis = $280,000 + $25,000 - $64,000 = $241,000
Capital Gain = $550,000 - $28,500 - $241,000 = $280,500
Capital Gains Tax Rates (2025)
| Income (Married Filing Jointly) | Long-Term Rate |
|---|---|
| Under $89,250 | 0% |
| $89,250–$553,850 | 15% |
| Over $553,850 | 20% |
No state income tax in Texas — this is a significant advantage vs. California (13.3%) or New York (10.9%) investors selling the same property.
Net Investment Income Tax (NIIT): 3.8% additional tax applies to investment property gains for high-income taxpayers ($200K single / $250K MFJ).
For our example: $280,500 gain × 15% federal rate + 3.8% NIIT = $52,000–$60,000 in federal tax. Texas owes nothing additional.
Depreciation Recapture: The Often-Forgotten Tax
When you sell, the IRS recaptures the depreciation deductions you've taken. This is separate from capital gains.
In our example: $64,000 depreciation claimed
- Depreciation recapture tax rate: 25% flat
- Tax owed: $64,000 × 25% = $16,000
This is owed regardless of your income level — it's a 25% flat rate on all recaptured depreciation. Many investors are surprised by this additional tax on top of capital gains.
The 1031 Exchange: Defer All Capital Gains and Depreciation Recapture
A Section 1031 Like-Kind Exchange allows you to defer all capital gains and depreciation recapture taxes by reinvesting the proceeds into a new investment property.
1031 Exchange Rules (Strict Timeline)
- Close on relinquished property (sell the Austin rental)
- Within 45 days: Identify up to 3 potential replacement properties in writing
- Within 180 days: Close on the replacement property
Both deadlines are from the same date (your Austin property closing) and are absolute — no extensions without IRS approval (rare).
Key 1031 Requirements
- Same taxpayer: The same entity/person who sells must buy
- Equal or greater value: You must purchase replacement property at or above the sale price
- Equal or greater equity: You cannot pull cash out ("boot") without that boot being taxed
- Like-kind: Virtually any US investment real estate qualifies — rental house → commercial building → land → multifamily all qualify
Using a Qualified Intermediary (Required)
You cannot touch the proceeds. A licensed Qualified Intermediary (QI) holds the sale proceeds in a separate account during the exchange period. You never receive the funds — they go from buyer directly to the QI, then to the replacement property seller.
QI cost: $800–$1,500 typically. Money well spent given the tax savings.
Austin 1031 Exchange Scenario
Austin investor sells $550,000 rental (would owe $70,000+ in taxes without 1031).
Instead, they identify a replacement property — perhaps two smaller Austin suburbs rentals, a Georgetown multifamily, or an NNN commercial property in a low-hassle location.
If they buy $600,000 in replacement property (more than sale price, no boot), they defer 100% of the capital gains and recapture taxes. Those taxes only become due when they eventually sell the replacement properties without another exchange.
Other Tax Strategies for Austin Rental Sellers
Installment Sale
If the buyer pays over time, you recognize gain as payments are received — spreading the tax bill over multiple years and potentially keeping annual income in lower tax brackets.
Opportunity Zone Investment
Austin has designated Opportunity Zones (primarily east Austin census tracts). Investing capital gains in an Opportunity Zone fund defers and potentially reduces taxes. Complex rules — consult a CPA.
Primary Residence Exclusion (If Applicable)
If you ever lived in the property as your primary residence, you may qualify for partial exclusion of gain ($250,000 single / $500,000 MFJ) for the period of personal use. This requires calculating a "home vs. rental use" ratio.
Frequently Asked Questions
Yes — capital gains is a federal tax. Texas has no state capital gains tax. Federal long-term rates (0%, 15%, 20%) apply based on income, plus potentially 3.8% NIIT and 25% depreciation recapture.
Yes, as long as it's been held as investment property (not primary residence) and you follow the strict 45/180 day rules. Any Austin rental qualifies for a 1031 exchange.
