Capital Gains Tax on Rental Property

Selling a rental in El Paso, whether it's a single house near Ysleta or a small multifamily building downtown, triggers two separate taxes at once: capital gains on the appreciation, and depreciation recapture on whatever was written off during the years it was rented. Owners who only budget for the first one are often surprised by the second when the closing statement and the following year's tax return arrive.

How the Gain Is Actually Calculated

The taxable gain is the net sale price minus the property's adjusted basis, and adjusted basis is not the same as the original purchase price. Basis rises with capital improvements, a new roof, an added unit, a major system replacement, and falls with every year of depreciation claimed on the property while it was a rental. A duplex bought a decade ago for $180,000 and depreciated the whole time can carry a taxable gain well above what the simple sale-price-minus-purchase-price math would suggest.

Federal and Texas Treatment

Texas has no state capital gains tax, which puts the full tax burden at the federal level: long-term capital gains rates of 0, 15, or 20 percent depending on income, plus the separate 25 percent depreciation recapture rate, plus a possible 3.8 percent net investment income tax for higher earners. An El Paso landlord doesn't get a state-level break the way a seller in California or New York would carry an added state bill, but the federal exposure on a long-held rental is still substantial on its own.

Short-Term Versus Long-Term Holding

Property held one year or less at sale is taxed at ordinary income rates, not the more favorable long-term rates, which is a meaningful difference for a landlord who bought and quickly flipped a rental rather than holding it. Most El Paso rental owners clear the one-year mark without thinking about it, but an investor considering a fast resale after a light renovation should run both scenarios before assuming long-term treatment applies.

The Deferral Option Once a Sale Is Decided

Once an owner has decided to sell rather than continue holding, the remaining lever is deferral rather than avoidance. A 1031 exchange lets the proceeds roll into another qualifying investment property, an El Paso multifamily building, industrial space, or a DST interest, without the gain or the recapture becoming taxable in the year of sale. It doesn't erase either tax, it moves both into the replacement property's future disposition, and it requires a qualified intermediary and strict identification and closing deadlines to work. Owners who wait until after listing an El Paso rental to ask about an exchange often lose the option entirely, since the intermediary has to be in place before the relinquished property closes, not after.

Frequently Asked Questions

Does Texas charge a separate state capital gains tax on a rental sale?

No. Texas has no state income or capital gains tax, so an El Paso rental sale is taxed only at the federal level, covering long-term capital gains, depreciation recapture, and potentially the net investment income tax.

What's the difference between capital gains tax and depreciation recapture?

Capital gains tax applies to the appreciation in the property's value above its adjusted basis. Depreciation recapture is a separate tax, generally at 25 percent, on the portion of gain that corresponds to depreciation deductions claimed during ownership. Both apply on the same sale but are calculated and taxed differently.

How is adjusted basis different from the original purchase price?

Adjusted basis starts at purchase price, increases with documented capital improvements, and decreases with depreciation taken during the rental period. A long-held rental usually has a lower adjusted basis than its purchase price would suggest, which increases the taxable gain at sale.

Can a 1031 exchange defer both the capital gains tax and the depreciation recapture?

Yes. A properly structured exchange defers both the capital gains portion and the depreciation recapture portion of the tax, rolling both into the replacement property's basis rather than triggering either at the time of sale.

Is there a way to reduce the taxable gain before selling an El Paso rental?

Documenting every capital improvement made over the ownership period is the most common way owners understate their true basis and overpay. Beyond that, the main levers are holding period, timing the sale for a lower-income year, or deferring through a 1031 exchange rather than reducing the gain itself.