What taxes do you owe when you sell a rental property in Flower Mound?
When you sell a Flower Mound rental, the IRS taxes two things: the depreciation you took (or should have taken) on the building, at a rate of up to 25 percent, and the rest of your gain at the long-term capital gains rate of 0, 15, or 20 percent. High earners add the 3.8 percent net investment income tax on top. Texas has no state income tax, so that is the whole bill. A 1031 exchange can defer all of it if you buy another investment property inside a 45-day and 180-day clock, and a former home you moved out of fewer than three years ago may still qualify for the $500,000 home-sale exclusion on most of the gain.
If you kept your old house as a rental when you moved up, or bought a rental on purpose, this is the post for the year you decide to sell it. The numbers below are illustrations, not advice. Your CPA runs the real ones, and you'll want that conversation before you sign a listing agreement, not after you close.
Depreciation recapture: the tax you pay on deductions you already took
Every year you owned the rental, you were allowed to deduct a slice of the building's cost as depreciation. For residential rental property, that slice is the building's basis spread over 27.5 years, straight line. The land doesn't depreciate.
Here's the part that surprises people. The IRS reduces your basis by the depreciation you were allowed to take whether or not you actually took it. IRS Publication 527 puts it plainly: you must reduce your basis by the full amount of depreciation you could have deducted. The tax world calls this "allowed or allowable." So "I never claimed depreciation" does not shrink the recapture bill. It just means you gave up deductions for years and still owe the tax on the way out. If that describes you, a CPA can often fix the missed deductions with a change in accounting method, and that is worth asking about before the sale.
When you sell, the gain attributable to that depreciation is called unrecaptured section 1250 gain. It's taxed at a maximum rate of 25 percent under section 1(h)(1)(E) of the tax code, not at the lower 15 or 20 percent capital gains rate. Everything above it is regular long-term capital gain, as long as you held the property more than a year.
A worked Flower Mound example
Say you bought a Flower Mound rental in January 2017 for $400,000. Your CPA allocated 20 percent to land and 80 percent to the building, so $320,000 depreciates. That's $11,636 a year. Over ten full years, that's about $116,400 of depreciation, taken or not.
Now you sell in late 2026 for $640,000, right around the Flower Mound median sale price of $642,694 that Redfin reported for the three months ending September 2026. Figure 7 percent in commissions and closing costs, or $44,800, so you realize $595,200.
- Adjusted basis: $400,000 minus $116,400 of depreciation = $283,600
- Total gain: $595,200 minus $283,600 = $311,600
- Unrecaptured section 1250 gain: $116,400, taxed at up to 25 percent = about $29,100
- Remaining long-term gain: $195,200, taxed at 15 percent for most married couples = about $29,300
- Net investment income tax, 3.8 percent on the whole $311,600 if your modified adjusted gross income is over $250,000 filing jointly = about $11,800
That's roughly $70,000 in federal tax on a $640,000 sale, or about $58,000 if the 3.8 percent surtax doesn't reach you. The 15 percent rate holds for married couples filing jointly with 2026 taxable income up to $613,700 per IRS Revenue Procedure 2025-32; above that, the rate on the regular gain steps up to 20 percent. The sale itself can push you across that line, which is one more reason to run the numbers with your CPA before you list.
Notice what the depreciation did. On a $400,000 purchase, it created $116,400 of gain that gets taxed at the higher 25 percent rate. The longer you've held the rental, the bigger that bucket gets.
The former-home exception most Flower Mound landlords miss
Many rentals in Flower Mound aren't investments someone went shopping for. They're the house a family lived in before they moved up to Bridlewood or Wellington, kept because the old mortgage rate was too good to give up. If that's your situation, you may still qualify for the section 121 home-sale exclusion: $250,000 of gain tax free, or $500,000 for a married couple filing jointly.
The test is ownership and use. You must have owned the home for at least two of the five years before the sale and lived in it as your main home for at least two of those five years (24 months total, not necessarily consecutive). You can use the exclusion once every two years.
The 2008 tax law added a wrinkle called nonqualified use: any period after 2008 when the property was not your main home can shrink the exclusion proportionally. But the statute carves out one big exception in section 121(b)(5)(C)(ii)(I): time after the last day you lived there does not count as nonqualified use. Move out, rent it, sell within the window, and the rental years at the end don't dilute the exclusion.
What the exclusion never covers is the depreciation. Section 121(d)(6) says the exclusion does not apply to gain equal to the depreciation taken after May 6, 1997. That piece is still unrecaptured section 1250 gain at up to 25 percent.
Run the same house through this door. You bought it in 2017 for $400,000, lived in it through December 2023, moved up, and rented it starting January 2024. You sell in December 2026 for $640,000.
- You lived there 24 of the last 60 months, so you pass the two-of-five test.
- The three rental years come after your last day of residence, so they are not nonqualified use.
- Depreciation for three years: about $34,900. That gain is taxed at up to 25 percent, roughly $8,700.
- The rest of the gain, about $195,200, is excluded under the $500,000 cap. Tax: zero.
Same house, same price, and the bill drops from about $70,000 to under $9,000. The difference is the calendar. Sell by the three-year mark after you move out and you keep the exclusion. Miss it and the whole gain is taxable. If you're renting out your old Flower Mound home right now, the date you moved out is the most important number in this decision. Pull it up before you do anything else.
The 1031 exchange: deferring the whole bill
If the property is a true investment rental and you plan to stay invested, a section 1031 like-kind exchange lets you sell and buy another investment property without paying the tax now. The gain, including the depreciation recapture, rolls into the replacement property and comes due when you eventually sell without exchanging.
The rules are rigid, and the IRS says the deadlines cannot be extended for any hardship short of a presidentially declared disaster:
- Both properties must be real property held for investment or business. Since the 2017 tax law, section 1031 applies only to real estate. Your primary residence, a second home, or a house you plan to move into does not qualify.
- You cannot touch the money. The sale proceeds go from the title company to a qualified intermediary, not to you. Taking control of the cash, even for a day, can disqualify the entire exchange. You also can't act as your own intermediary, and your agent, CPA, or attorney who has worked for you in the past two years generally can't either.
- 45 days to identify. From the day your Flower Mound sale closes, you have 45 calendar days to identify replacement property in writing to the intermediary.
- 180 days to close. You must close on the replacement within 180 days of the sale, or by the due date of your tax return for that year including extensions, whichever comes first. A December sale can shorten the window unless you extend your return.
- Report it on Form 8824 with your return for the year of the sale.
A full deferral generally means buying something of equal or greater value and reinvesting all the equity. In the example above, that's roughly $595,200 of proceeds going into the next property, with any cash you pull out ("boot") taxed. For a Flower Mound seller, the practical problem is step 3: finding and identifying the right replacement in 45 days in a market where homes are selling in about 37 days. The intermediary should be engaged, and the replacement search started, before your listing goes active, not after you have a contract.
One more trap for families who think ahead: if you exchange into a rental and later decide to move into it, section 121(d)(10) blocks the home-sale exclusion for five years from the date you acquired it through the exchange. The IRS also treats the rental years before a conversion as nonqualified use. Exchange into your next home is a strategy that exists, but it is a multi-year plan with a CPA, not a shortcut.
Timing moves that change the number
A few decisions in the sale itself move the tax bill, and they all have to be made before closing.
Seller financing and the installment method. If you carry a note for the buyer, you generally report the gain as payments come in. For a residential rental depreciated straight line, there is no accelerated depreciation to recapture up front, so the depreciation gain goes into the installment calculation too. But the Treasury regulation on installment sales (Reg. 1.453-12) takes the 25 percent unrecaptured section 1250 gain first, so your earliest payments carry the highest-taxed gain. Spreading the sale over two tax years can still keep you under the $613,700 breakpoint or the $250,000 surtax line. Your CPA models this; your agent builds the note terms into the contract.
The closing date. A sale that closes December 29 lands in one tax year; a sale that closes January 5 lands in the next. If this year already includes a big bonus or another sale, that week can matter. Texas sellers have no state income tax to coordinate, which makes the federal timing the whole picture.
Selling costs. Commissions, title fees, and the repairs you make to get the house sold reduce the amount realized. Keep every invoice. The home improvements you made over the years (a new roof, a replaced HVAC system) were depreciated separately and have their own recapture, so bring the full depreciation schedule to your CPA, not just the original purchase.
The tenant. None of this changes the lease, the notice rules, or how you show an occupied house. That side of the sale is in our post on selling a Flower Mound home with a tenant in it. If the property came to you through an estate, the stepped-up basis rules for an inherited Flower Mound home change the math entirely, usually in your favor.
The tax is one line on a longer net sheet. Our net proceeds breakdown for Flower Mound sellers covers the commissions, title, and closing side, and the capital gains post for your primary residence covers the house you actually live in. Put the three together and you have your real number.
Frequently Asked Questions
Do I have to pay depreciation recapture if I never claimed depreciation on my rental?
Yes. The IRS reduces your basis by the depreciation that was allowable whether or not you deducted it, so the gain from that depreciation is taxed at up to 25 percent either way. Ask your CPA about catching up the missed deductions with a change in accounting method before you sell.
What is the depreciation recapture tax rate on a rental property?
Gain attributable to straight-line depreciation on residential rental property is unrecaptured section 1250 gain, taxed at a maximum rate of 25 percent. The rest of your long-term gain is taxed at 0, 15, or 20 percent depending on your taxable income, plus a possible 3.8 percent net investment income tax.
Can I use the $500,000 home-sale exclusion on a house I rented out after moving?
Often, yes. If you owned the home and lived in it as your main home for at least two of the five years before the sale, the rental period after you moved out does not count as nonqualified use. You still owe tax on the depreciation taken while it was rented, and you must sell within that five-year window to keep the exclusion.
How long do I have to complete a 1031 exchange after selling my Flower Mound rental?
You have 45 days from closing to identify replacement property in writing and 180 days from closing (or your tax return due date with extensions, if sooner) to close on it. The proceeds must be held by a qualified intermediary the whole time, and the deadlines cannot be extended for ordinary hardship.
Does Texas charge capital gains tax on the sale of a rental property?
No. Texas has no state income tax, so the only income tax on the sale is federal: the 25 percent rate on depreciation, the long-term capital gains rate on the rest, and the 3.8 percent net investment income tax if your income is high enough. Denton County property taxes are prorated at closing but are not a tax on the gain.
Know your number before you list
Selling a Flower Mound rental is really two decisions: whether to pay the tax, defer it, or exclude it, and when to close so the right rule applies. The depreciation bill is fixed the day you bought the house. Everything else, from the three-year window on a former home to the 45-day clock on an exchange, depends on dates you control if you plan early enough.
This is the conversation I have with every client who kept their old house when they moved up. We pull the move-out date, estimate the depreciation, and decide the path before the sign goes in the yard. If you're thinking through a move like this, schedule a free Move-Up Strategy Call ... thirty minutes, no pitch, just a clear-headed look at where you are and what your best next move looks like.
This article is general information, not legal, tax, insurance, or lending advice. The worked examples use rounded figures and assumptions stated in the text; your allocation between land and building, your depreciation schedule, and your income determine the actual result. Verify your specific numbers with your CPA, your agent, your title company, and where appropriate a licensed Texas attorney.
About Brian White
Brian White helps families in Northwest DFW make their move-up cleanly, selling and buying in one synchronized step. He built BlueFuse Group on a simple standard: other-first service, proactive at every turn, faith and excellence in equal measure. Brian has been married to Tisha for 27 years and is dad to three adult sons. When he's not protecting a family's equity or untangling a tight closing timeline, you'll find him chasing a round of golf or at Valley Creek Church.
Schedule a Move-Up Strategy Call ... no pitch, just a clear-headed look at your next move.
