Texas is one of the most favorable states in the country for commercial real estate investors. No state income tax means no state-level capital gains tax when you sell. But that advantage only goes so far. Federal capital gains tax, depreciation recapture, and the Net Investment Income Tax all still apply, and together they can add up to a substantial bill on a profitable sale. At Commercial Property Offer, we work with Texas investors navigating every stage of this process.

This guide explains exactly what taxes apply when selling commercial property in Texas, with current 2026 federal rates, step-by-step calculations using Texas market examples, and the most effective legal strategies for reducing what you owe.

Texas tax advantage summary: Texas imposes no state income tax, no state capital gains tax, and no state estate or inheritance tax. Your entire tax liability on a commercial property sale comes from federal law, which still represents a significant obligation for most investors.

Short-Term vs. Long-Term Capital Gains Tax on Commercial Property

The single most important factor in your federal capital gains tax rate is how long you held the property before selling.

Short-term gains properties held for one year or less are taxed as ordinary income at federal rates from 10% to 37%.
Long-term gains properties held for more than one year (at least 366 days) qualify for preferential federal rates of 0%, 15%, or 20%.

The difference is significant. A Texas investor selling a Houston warehouse after 11 months pays up to 37% federally on the gain. Waiting just two more months drops that maximum rate to 20%, a 17-percentage-point swing that can mean tens of thousands of dollars on a typical Texas commercial sale. Because there is no state tax to complicate the picture, holding period timing is the single clearest lever Texas investors have before the 20% threshold.

2026 Federal Capital Gains Tax Rates for Commercial Real Estate Investors

Long-term capital gains tax rates for 2025 (transactions occurring in tax year 2025, filed in 2026) are as follows. These are federal rates; Texas adds nothing on top.

Federal Rate	Single Filers	Married Filing Jointly
0%	Up to $48,350	Up to $96,700
15%	$48,351 – $533,400	$96,701 – $600,050
20%	Over $533,400	Over $600,050

Most Texas commercial property investors fall into the 15% federal bracket. The 20% rate only kicks in above $533,400 (single) or $600,050 (married filing jointly) in total taxable income. Because Texas has no state income tax, your effective combined rate is simply the federal rate compared to, say, a California investor facing an additional 13.3% on the same gain.

Depreciation Recapture Tax on Commercial Real Estate (Section 1250)

Texas’s no-income-tax status does not shelter you from depreciation recapture, and this is where many Texas investors are caught off guard. If you claimed depreciation deductions on the property during ownership, which the tax code requires you to do, the IRS taxes back that benefit when you sell.

Under Section 1250, the portion of your gain attributable to accumulated depreciation on real property is taxed at a maximum federal rate of 25%, regardless of your income level, how long you held the property, or what state the property is in. For personal property components (equipment, fixtures), recaptured depreciation can be taxed at ordinary income rates up to 37%.

Depreciation Recapture Example: Dallas Industrial Property

You purchased a Dallas warehouse for $1,000,000 and claimed $200,000 in depreciation over five years. You sell for $1,300,000.

Depreciation recapture: $200,000 × 25% = $50,000 federal tax
Remaining capital gain: $100,000 × 15% (assuming 15% bracket) = $15,000 federal tax
Texas state tax: $0
Total tax before NIIT: $65,000

A comparable sale in California would add roughly $39,000 in state tax on the same gain, illustrating the concrete dollar value of Texas’s no-income-tax advantage.

Cost segregation studies are popular among Texas investors, particularly on large industrial and office properties in the Dallas-Fort Worth and Houston corridors. They can front-load depreciation and reduce taxable income during ownership, but they increase the recapture amount at sale. Factor this into your exit strategy from the beginning.

Net Investment Income Tax (NIIT) on Commercial Property Sales

High-income Texas investors face an additional 3.8% federal surtax: the Net Investment Income Tax (NIIT). It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds these thresholds:

Filing Status	MAGI Threshold
Single / Head of Household	$200,000
Married Filing Jointly	$250,000
Married Filing Separately	$125,000

Important: These thresholds are not indexed for inflation and have not changed since the NIIT was introduced in 2013. Given rising commercial property values in Austin, Houston, and Dallas-Fort Worth, more Texas investors cross these thresholds each year.

If you are married filing jointly with $350,000 in MAGI and a $100,000 capital gain from selling a San Antonio retail center, you owe NIIT on the $100,000 that exceeds the $250,000 threshold an extra $3,800 in federal tax on top of your regular capital gains liability.

How to Calculate Capital Gains Tax When Selling Commercial Property

Follow these steps to estimate your federal tax liability before listing. Texas adds no state tax to this calculation.

Calculate your adjusted basis: Original purchase price + capital improvements − accumulated depreciation
Calculate total gain: Sale price − adjusted basis − selling costs (commissions, legal fees, transfer taxes)
Separate the gain into components:
- Depreciation recapture (taxed at max 25% federal)
- Remaining long-term capital gain (taxed at 0%, 15%, or 20% federal)
- NIIT surcharge if applicable (3.8% federal)
State tax: $0 for Texas residents selling Texas property.

Full Worked Example: Austin Office Building Sale

Purchase price	$2,000,000
Capital improvements	+$300,000
Accumulated depreciation	−$400,000
Adjusted basis	$1,900,000
Sale price	$2,800,000
Selling costs	−$100,000
Total gain	$800,000

Federal tax breakdown (assuming 20% long-term rate + NIIT applies):

Depreciation recapture: $400,000 × 25% = $100,000
Capital gains on remaining profit: $400,000 × 20% = $80,000
NIIT: $800,000 × 3.8% = $30,400
Total federal tax: $210,400
Texas state tax: $0
Total combined tax: $210,400

The same sale in California would trigger an additional $106,400 in state income tax, pushing total liability to roughly $317,000. The Texas advantage on this transaction alone is over $100,000.

How to Determine Your Cost Basis on Commercial Property

An accurate cost basis directly reduces your taxable gain. Your adjusted basis typically includes:

Original purchase price
Closing costs at acquisition (title fees, attorney fees, due diligence)
Capital improvements made during ownership
Legal fees related to acquisition

Your basis is then reduced by all accumulated depreciation deductions claimed, whether or not you actually took them on your returns. The IRS requires this adjustment regardless of whether the deductions were actually used.

If you received the property as a gift or inheritance, the basis rules differ. Inherited property generally receives a stepped-up basis to fair market value at the date of the decedent’s death, which can eliminate accrued gains entirely.

Capital Improvements vs. Repairs: What Affects Your Property Tax Basis

This distinction has a direct impact on your taxable gain at sale and is worth careful attention given how actively Texas commercial properties are often upgraded and repositioned.

Capital improvements are added to your cost basis, reducing your gain dollar-for-dollar at sale. They include:

Roof replacement
HVAC system installation or full replacement
Structural additions or major renovations
Parking lot resurfacing (if it extends useful life)
Energy efficiency upgrades (increasingly common in Texas commercial retrofits)

Repairs are deducted in the year they occur and do not affect your basis. Examples include fixing a leak, painting, or routine maintenance.

Keep detailed records and receipts for every capital expenditure. Many Texas investors, particularly those who held properties through the rapid appreciation cycles in Austin and Dallas-Fort Worth, leave significant basis adjustments on the table at sale simply because records were not maintained.

How to Defer Capital Gains Tax with a 1031 Like-Kind Exchange

A 1031 exchange is the most widely used strategy for deferring capital gains taxes on Texas commercial real estate. It allows you to sell one investment property and reinvest the proceeds into another “like-kind” property while deferring, not eliminating, the federal capital gains tax and depreciation recapture obligations.

Key requirements:

You must identify a replacement property within 45 days of the sale
You must close on the replacement property within 180 days
A qualified intermediary must hold the proceeds; you cannot receive the funds directly
The replacement property must be of equal or greater value to defer the full gain
Both properties must be held for investment or business use (not personal use)

Texas-to-Texas exchanges are common and straightforward. The strong commercial markets in Houston, Dallas-Fort Worth, Austin, and San Antonio give Texas investors ample replacement property options within the state. Exchanging a retail property in Houston for an industrial building in the DFW Metroplex is a standard like-kind exchange with no complications. Texas investors also frequently exchange into other states or exchange out-of-state properties into Texas to consolidate holdings.

When executed correctly, both capital gains taxes and depreciation recapture are deferred, allowing capital to continue compounding on a pre-tax basis. Taxes become due when you eventually sell the replacement property without a subsequent 1031 exchange or at death (in which case heirs may receive a stepped-up basis).

Using Installment Sales to Spread Your Capital Gains Tax Liability

An installment sale lets you spread the recognition of capital gains over multiple years by receiving the sale proceeds in payments rather than a lump sum. Tax is paid as each installment is received, which can keep you in lower federal brackets in any given year.

Installment sales work well when selling to an owner-user who needs seller financing, a common scenario in Texas’s secondary markets and smaller cities. If you need to sell your commercial space fast, however, a lump-sum sale with upfront tax planning is typically more practical. Key requirements:

At least one payment must be received in a tax year after the year of sale
Depreciation recapture must be reported in full in the year of sale, regardless of payment timing
The installment method cannot be used for property sold at a loss or for publicly traded property

Consult a tax advisor before structuring any installment arrangement, as the rules around interest imputation and related-party sales can complicate the strategy.

Opportunity Zone Investments to Defer Capital Gains on Commercial Real Estate

Texas has a significant number of designated Opportunity Zones, concentrated in lower-income census tracts in Houston, Dallas, San Antonio, El Paso, and smaller cities. Qualified Opportunity Funds (QOFs) allow investors to reinvest capital gains from any source, including Texas commercial real estate sales, into these zones under the 2017 Tax Cuts and Jobs Act.

How QOF investing works: After selling a Texas commercial property, you have 180 days to invest your capital gain (not the full sale proceeds, only the gain itself) into a QOF. The fund must in turn deploy at least 90% of its assets into qualified Opportunity Zone property or businesses. You can invest in an existing QOF or form your own if you plan to develop directly in a Texas Opportunity Zone.

Deferral of the original gain: Tax on the reinvested gain is deferred until you sell or exchange your QOF interest, or until December 31, 2026, whichever comes first. For investors still holding QOF positions today, that federal deadline is imminent.
Exclusion on new appreciation: If you hold the QOF investment for at least 10 years and make a timely election when you sell, any appreciation in the QOF itself is entirely excluded from federal income tax.

Critical 2026 deadline: The deferred gain becomes taxable on December 31, 2026, regardless of how long you hold the QOF investment or whether you have sold it. If you entered a QOF in 2021 or earlier, plan for this federal tax liability now. The basis step-up provisions that previously reduced the deferred gain amount (10% after 5 years, 15% after 7 years) have expired and are no longer available for investments made after 2021.

What to watch out for: QOF compliance requirements are strict. The fund must pass the 90% asset test every six months, and the underlying property must meet “original use” or “substantial improvement” standards. You cannot simply buy and hold an existing Texas building without investing significant additional capital. Work with counsel experienced specifically in Opportunity Zone compliance.

No State Capital Gains Tax: What That Means in Practice

Texas is one of nine states with no state income tax, which means no state-level capital gains tax on commercial real estate sales. This is a meaningful and concrete advantage but it comes with important nuances Texas investors need to understand.

The Full Texas Tax Picture on a Commercial Sale

When you sell Texas commercial property as a Texas resident, your total tax obligation comes entirely from federal law: capital gains rates of 0% to 20%, depreciation recapture at up to 25%, and potentially the 3.8% NIIT. No Texas Comptroller filing, no state return for the gain.

Texas Property Tax: A Separate Consideration

Texas funds its government primarily through property taxes rather than income taxes, and Texas commercial property tax rates are among the highest in the nation, typically ranging from 1.8% to 2.5% of assessed value annually, depending on the county and municipality. This affects your holding cost during ownership but does not create a tax event at the point of sale.

Nonresidents Selling Texas Commercial Property

If you live outside Texas but own commercial property in the state, you owe federal capital gains tax on the sale. Your home state may also tax the gain, though most states provide a credit for taxes paid to the state where the property is located. Because Texas imposes no tax, there is no Texas-sourced credit to offset; you simply pay your home state’s full rate. This makes Texas-located property particularly attractive to hold as a nonresident: the property generates no state tax on sale regardless of where you live.

Multi-State Scenarios for Texas Investors

Texas investors who own property in other states face those states’ capital gains tax rules on those properties. If you are a Texas resident selling a commercial building in California, California will assert its 13.3% income tax on the California-sourced gain. Your Texas residency provides no shield against California’s source-based tax. The reverse is not true a California resident selling Texas property owes California tax on that gain because California taxes its residents on worldwide income.

How to Use Capital Loss Harvesting to Offset Commercial Property Gains

Capital losses from other investments can offset your commercial real estate gains dollar-for-dollar. This federal strategy, known as tax-loss harvesting, can materially reduce your tax bill in the year of sale.

Sources of offsetting losses include:

Selling underperforming investment properties in the same tax year
Realizing losses in stock or other securities portfolios
Using suspended passive activity losses from passive rental activities that have been accumulating because they exceeded passive income in prior years, a full disposition of the passive activity triggers the release of all suspended losses

Note that capital losses cannot offset depreciation recapture income. Recapture is taxed as ordinary income and is reduced only by ordinary losses, not capital losses.

Capital Gains Tax for LLCs and Partnerships Holding Commercial Property

Most Texas commercial properties are held in pass-through entities, LLCs, limited partnerships, or S corporations. Texas has no state franchise tax on passive holding entities (entities whose only activity is owning and leasing real estate are generally exempt from the Texas Margin Tax). At the federal level, these entities do not pay income tax directly. Income, gains, and losses flow through to individual owners in proportion to their ownership interest, reported on a Schedule K-1. Whether you are a first-time seller or a seasoned commercial property investor, understanding your entity structure before a sale is essential.

When a property held by a Texas LLC is sold, each member reports their allocable share of the capital gain, depreciation recapture, and any applicable NIIT on their federal return. The entity structure itself does not change the federal tax treatment of the underlying gain.

Partnership agreements can affect how gains are allocated among partners, particularly where partners have different tax situations or contributed property with built-in gains. Review the partnership agreement and consult a Texas real estate CPA before any major transaction.

Estate Planning and the Step-Up in Basis for Commercial Property

One of the most powerful tax strategies available to long-term Texas commercial property owners is simply holding the asset until death. When heirs inherit property, its cost basis is stepped up to the fair market value at the date of the owner’s death under IRC Section 1014, eliminating all accrued federal capital gains and depreciation recapture for income tax purposes.

Texas adds to this advantage: it has no estate tax or inheritance tax. Federal estate tax applies to estates above the federal exemption threshold (currently $13.61 million per individual as of 2025), but the absence of a state-level death tax makes Texas one of the most favorable states for intergenerational transfer of commercial real estate.

For Texas investors holding highly appreciated commercial properties with large accumulated depreciation, particularly those who bought in Austin, Houston, or Dallas before the run-up of the past decade, the step-up in basis can represent a more valuable outcome than any deferral strategy. Weigh it carefully against liquidity needs and the costs of holding the asset.

Record-Keeping Requirements for Commercial Real Estate Capital Gains

The IRS can audit a return up to three years after filing, or six years if you underreported income by more than 25%. For commercial real estate, where you may own a property for decades, this means retaining records from the original purchase through the final sale.

Essential documents to keep indefinitely:

Original purchase contract and HUD-1 or closing disclosure
Receipts and invoices for all capital improvements
Annual depreciation schedules (Form 4562)
All federal tax returns filed during ownership
Any 1031 exchange documentation, including qualified intermediary agreements
Appraisals used to establish value at acquisition or inheritance
Texas property tax records (useful for establishing improvement costs and valuation history)

Every situation is unique. If you want to talk through your options before listing, contact us for a straightforward conversation about your Texas property and what makes sense for your circumstances.

FAQs

Does Texas have a capital gains tax on commercial property?

No. Texas has no state income tax and no state capital gains tax. Selling commercial property in Texas does not create any Texas state tax obligation. However, federal capital gains tax still applies at rates of 0%, 15%, or 20% depending on your income, plus depreciation recapture at up to 25% and potentially the 3.8% NIIT for high earners.

How can I reduce capital gains tax when selling commercial property in Texas?

The most effective strategies are a 1031 like-kind exchange to defer taxes by reinvesting in qualifying replacement property, installment sales to spread the tax burden across multiple years, capital loss harvesting to offset gains with losses from other investments, and holding until death to provide heirs a stepped-up basis. Texas’s lack of state tax means all of your planning effort focuses on federal liability.

What is depreciation recapture on Texas commercial real estate?

Depreciation recapture is the federal IRS mechanism that taxes the depreciation deductions you claimed during ownership. Under Section 1250, recaptured depreciation on real property is taxed at a maximum federal rate of 25%. Texas imposes no additional state tax on this amount.

How does a 1031 exchange work for Texas commercial property?

A 1031 exchange lets you sell Texas commercial property and defer federal capital gains taxes by reinvesting proceeds into another qualifying investment property anywhere in the United States. You must identify a replacement property within 45 days of the sale and close within 180 days. A qualified intermediary must hold the sale proceeds; you cannot receive the funds directly.

Do I owe capital gains tax if I inherit commercial property in Texas?

Generally, no, not on gains that accrued before your inheritance. When you inherit Texas commercial property, the federal basis is stepped up to fair market value at the date of death, eliminating income tax on prior appreciation. Texas also has no state estate or inheritance tax. If you sell shortly after inheriting at approximately the inherited value, you owe little or no tax. Gains that accrue after the inheritance date are taxable when you sell.

Capital Gains Tax On Commercial Property: Complete Guide For Property Investors