Selling Rental Property in El Paso: Tax Implications
What El Paso landlords need to know about capital gains, depreciation recapture, and 1031 exchanges when selling an investment property in Texas.
Selling a rental property in El Paso triggers two separate federal tax events: capital gains tax on the appreciation and depreciation recapture tax on the deductions you've taken over the years. Texas has no state income tax, which is a significant advantage. Understanding these rules before selling can help you time the sale or use a 1031 exchange to defer taxes entirely.
Note: This article provides general information about common tax rules. Consult a CPA or tax advisor for advice specific to your situation.
Texas Advantage: No State Income Tax
Texas does not have a state income tax, which means when you sell a rental property in El Paso, you only pay federal taxes on the gain. This is a meaningful advantage compared to sellers in California (up to 13.3% state capital gains) or New York (up to 10.9%).
Capital Gains Tax on El Paso Investment Properties
When you sell a rental property for more than your adjusted cost basis, the profit is subject to federal capital gains tax.
Long-term capital gains rates (assets held over 1 year):
| Taxable Income (Single) | Capital Gains Rate |
|---|---|
| Up to $47,025 | 0% |
| $47,026–$518,900 | 15% |
| Over $518,900 | 20% |
Net Investment Income Tax (NIIT): An additional 3.8% applies to investment income for higher earners (modified AGI over $200,000 single / $250,000 married filing jointly).
The $250,000/$500,000 primary residence exclusion does NOT apply to rental properties - even if you once lived in the home.
Depreciation Recapture: The Tax Most Sellers Forget
Every year you own a rental property, you can depreciate the building (not the land) over 27.5 years. This reduces your taxable rental income - but when you sell, the IRS "recaptures" those deductions at a maximum rate of 25%.
Example:
- Bought El Paso rental in 2015 for $150,000 ($130,000 building, $20,000 land)
- Depreciated $4,727/year for 10 years = $47,270 total depreciation taken
- Depreciation recapture tax at 25% = ~$11,818 owed to IRS at sale
- This is owed regardless of whether you actually took the deductions
This is separate from capital gains tax - you pay both.
Your Adjusted Cost Basis
Your taxable gain is: Sale Price − Adjusted Cost Basis
Adjusted cost basis = Purchase price + capital improvements − depreciation taken
Capital improvements that increase basis: new roof, HVAC replacement, additions, major renovations. Repairs and maintenance do NOT increase basis.
El Paso Rental Property Market: What Sellers Are Getting
For context, the current El Paso investment property market (January 2026):
| Submarket | Median Sale Price | Avg DOM | Notes |
|---|---|---|---|
| All El Paso | $264,867 | 72 days | Stable seller's market |
| East (79936/79935/79925) | $212,324 | 38 days | Fastest-moving inventory |
| Northeast | $231,526 | 62 days | Military rental demand area |
| Lower Valley | $174,063 | 43 days | Most affordable entry point |
| Horizon / Socorro | $278,689 | 117 days | New construction dominant |
The Lower Valley and East Side have traditionally hosted the highest concentration of El Paso investment properties, given their price points and rental demand from Fort Bliss-area military families.
1031 Exchange: How to Defer Taxes Entirely
A 1031 like-kind exchange allows you to defer all capital gains and depreciation recapture taxes by rolling proceeds into a new "like-kind" investment property (another rental, not a primary residence).
Key rules:
- 45 days from closing to identify replacement properties
- 180 days from closing to close on the replacement
- Must use a qualified intermediary (QI) - you cannot touch the money
- Must acquire property of equal or greater value to defer all gain
- Must have equal or greater debt on the new property
El Paso has qualified intermediaries who facilitate 1031 exchanges. This is one of the most powerful tax deferral strategies available to landlords.
Installment Sales (Seller Financing)
If you carry a note for the buyer, you spread the gain recognition across multiple years as you receive payments. This can be a useful strategy if you're near an income threshold where capital gains rates would jump.
Frequently Asked Questions
Is there a capital gains exemption for rental properties in Texas?
The primary residence exclusion ($250K/$500K) doesn't apply. However, Texas has no state capital gains tax, which is the main state-level advantage.
How do I calculate my gain on a rental property sale in El Paso?
Sale price − (original purchase price + capital improvements − total depreciation taken) = taxable gain. Get your depreciation schedule from your tax returns (Schedule E, Form 4562).
What is the tax rate on depreciation recapture?
Maximum 25% federal rate on depreciation recapture (called "unrecaptured Section 1250 gain"). This is capped at 25% regardless of your regular income tax bracket.
Can I avoid depreciation recapture with a 1031 exchange?
Yes - a properly executed 1031 exchange defers both capital gains AND depreciation recapture until you eventually sell the replacement property (or die, in which case heirs receive a stepped-up basis).
What if I converted the rental to a primary residence before selling?
If you lived in the home as your primary residence for at least 2 of the last 5 years, you may qualify for the partial primary residence exclusion. However, depreciation taken during rental periods is still subject to recapture. This is a complex scenario - consult a CPA.
This article is for general informational purposes only and does not constitute tax advice. Consult a licensed CPA or tax professional for advice specific to your situation.
John David Peña | License #0733512 | Peña El Paso Realty Group | Brokered by Home Pros Real Estate Group | Broker License #0483789
Related Articles: