In most cases, no. The IRS lets a married couple exclude up to $500,000 of profit from selling a primary home, and a single filer up to $250,000, but that number never moves regardless of the home's price. Sell a $3 million house you bought for $1.2 million and the $1.8 million gain still only gets a $500,000 exclusion. The remaining $1.3 million is taxed as a capital gain.

The Math Nobody Runs Until the Closing Statement

Take a couple who bought a home in The Woodlands for $1.2 million and sells it today for $2.8 million, a $1.6 million gain before adjustments. They've lived there more than two of the last five years, so they qualify for the full $500,000 married exclusion. That leaves $1.1 million taxed as a long-term capital gain. In 2026, married joint filers hit the 20% federal bracket once taxable income passes roughly $613,700, which most sellers of a $2.8 million home will clear easily, and the 3.8% net investment income tax kicks in once modified adjusted gross income passes $250,000. Combined, that's about 23.8% federal tax on the taxable portion, or roughly $261,800 on this sale.

Texas adds nothing on top of that. There's no state income tax and no separate state capital gains tax here, which is a real difference from a seller doing the same math in California or New York, where another 5 to 13 percent can apply on top of the federal bill.

Federal Capital Gains, 2026 (Married Filing Jointly)

• 0% bracket: taxable income up to $98,900.
• 15% bracket: taxable income from $98,901 to $613,700.
• 20% bracket: taxable income above $613,700.
• Net investment income tax: an added 3.8% once modified adjusted gross income passes $250,000, on top of whichever bracket applies.

The Basis Adjustment Most Sellers Undercount

Your taxable gain isn't sale price minus purchase price. It's sale price minus your adjusted cost basis, and every real capital improvement raises that basis and shrinks the gain. A new roof, a pool, an addition, a full kitchen or primary bath remodel, a generator, a new HVAC system, all of it counts if you can document it. Routine maintenance, painting, and repairs don't. Peter's background is in construction and lending before real estate, and the question he asks every luxury seller early is whether they kept contractor invoices separated by project, because that paperwork is what turns a vague "we've put money into this house" into a real basis adjustment that survives an audit.

On a home with $400,000 in documented capital improvements over the years, that's $400,000 less gain exposed to tax, which on the example above is worth roughly $95,200 in federal tax at the combined 23.8% rate.

What This Means Before You List

None of this changes when you should sell, but it changes what you should bring to a tax professional before you do. Pull together closing documents from the purchase, every capital improvement invoice you can find, and a realistic estimate of sale price, and run the numbers with a CPA while there's still time to adjust timing or structure, not after the closing statement is already signed. Our luxury home page and our post on what it takes to sell a luxury home in today's market are good next reads if you're weighing a listing timeline, and our sellers guide covers the rest of the process.

Frequently Asked Questions

Does the home sale exclusion get bigger for a more expensive house?
No. The IRS home-sale exclusion is a flat $250,000 for a single filer or $500,000 for a married couple filing jointly, regardless of whether the house sold for $400,000 or $4 million. A luxury seller with a large gain has more profit sitting above that fixed line, so the tax bill scales with the sale price, not the exclusion.

What tax rate applies to the gain above the exclusion?
Gain above the exclusion is taxed at long-term capital gains rates, which are 0%, 15%, or 20% depending on total taxable income, plus a 3.8% net investment income tax once modified adjusted gross income passes $250,000 for a married couple. Most luxury sellers land in the 20% bracket and owe the surtax, for a combined federal rate of about 23.8%.

Does Texas add its own capital gains tax on top of the federal one?
No. Texas has no state income tax, so there is no additional state-level capital gains tax on a home sale here, unlike California or New York, where a seller can face another 5 to 13 percent on top of the federal bill. That gap is real money on a large gain and one of the underrated financial advantages of selling in Texas.

Can capital improvements lower the tax bill on a luxury home sale?
Yes. Money spent on capital improvements, like a new roof, an addition, a pool, or a full kitchen remodel, gets added to your cost basis, which directly shrinks the taxable gain. Routine repairs and maintenance don't count, so keeping receipts and separating the two categories from day one matters more the larger the eventual sale price gets.

Peter & Vicky Royster
The Move Live Love TX Team™
Houston Real Estate Specialists
Family First. Texas Roots. We've Got You Covered.™
10200 Grogans Mill Rd., Suite 125
The Woodlands, TX 77380
(713)-805-6247
www.movelivelovetx.com