Tax Guides

Home Sale Capital Gains Explained

Selling a primary residence in Dallas, TX is governed by a different set of rules than selling investment property. Section 121 of the Internal Revenue Code allows an individual filer to exclude up to two hundred fifty thousand dollars of gain, and a married couple filing jointly to exclude up to five hundred thousand dollars of gain, from the sale of a primary residence, provided the owner meets the ownership and use test, generally owning and using the home as a primary residence for at least two of the five years before the sale. Gain above the exclusion amount is generally taxed at long term capital gains rates if the property was held more than one year. Because Section 1031 applies only to real property held for investment or business use, a primary residence generally does not qualify for exchange treatment, and an investor cannot combine the two benefits on the same square footage used purely as a personal home. There is a limited exception when a property has mixed use, such as a duplex where one unit was the owner's primary residence and the other unit was rented, in which case Revenue Procedure 2005 14 provides a framework for applying the Section 121 exclusion to the residential portion and a 1031 exchange to the rental portion. Texas has no state income tax, so any gain above the federal exclusion is generally taxed only at the federal level. This page is general education and homeowners should confirm ownership and use test details with a tax professional before listing.