Selling a Rental Property in El Paso: Taxes, Capital Gains, and What Landlords Should Know

Selling a rental property in El Paso can be a great opportunity to cash out on your investment, move your money into another property, or take advantage of changes in the real estate market.

But before putting your rental home on the market, it's important to understand the tax implications.

Unlike selling your primary residence, selling an investment property can involve more than one type of federal tax. You may owe capital gains tax on the profit and depreciation recapture tax on the deductions you claimed while owning the property.

The good news for Texas property owners is that the state does not have an individual income tax. However, federal tax obligations still apply.

Here's what El Paso landlords should understand before selling a rental property.

Does Texas Have a Capital Gains Tax on Rental Property?

Texas does not have a state individual income tax. This means you generally do not pay state income tax on the profit from selling your rental property.

However, you may still owe federal taxes on the sale.

Depending on how long you owned the property, your adjusted cost basis, your income, and the depreciation you claimed, your tax bill could include:

• Federal capital gains tax
• Depreciation recapture tax
• Net Investment Income Tax (NIIT), if applicable

Understanding these taxes before selling can help you plan ahead and avoid unexpected expenses.

Capital Gains Tax When Selling a Rental Property

Capital gains tax generally applies when you sell an investment property for more than its adjusted cost basis.

Your adjusted cost basis is not always the same as what you originally paid for the property. It accounts for certain improvements and depreciation over time.

Short-Term vs. Long-Term Capital Gains

How long you own the property can affect how your profit is taxed.

• Short-term capital gains: Generally apply when you own the property for one year or less. These gains are typically taxed at your ordinary federal income tax rate.
• Long-term capital gains: Generally apply when you own the property for more than one year. Depending on your taxable income, federal rates are typically 0%, 15%, or 20%.

The applicable tax brackets and income thresholds can change from year to year.

The original article also notes that higher-income investors may owe an additional 3.8% Net Investment Income Tax, depending on their income and filing status.

Does the Primary Residence Tax Exclusion Apply?

Not automatically.

The federal primary residence exclusion, which may allow eligible homeowners to exclude up to $250,000 in gains for single filers or $500,000 for married couples filing jointly, generally does not apply to a property used solely as a rental.

However, if you previously lived in the home and later converted it into a rental, your situation may be different. The time you used the property as your primary residence, along with any depreciation claimed, can affect the tax calculation.

It's best to have a CPA review your ownership and occupancy history before assuming you qualify for an exclusion.

What Is Depreciation Recapture?

Depreciation recapture is one of the most important tax considerations when selling a rental property.

While you own a rental, you may be able to deduct depreciation on the building over time. For residential rental property, the standard depreciation period is generally 27.5 years.

This reduces your taxable rental income while you own the property.

However, when you sell, the IRS may require you to account for the depreciation deductions you claimed or were allowed to claim.

This is known as depreciation recapture.

For certain residential rental property gains, the federal tax rate on unrecaptured Section 1250 gain can reach a maximum of 25%.

Example of Depreciation Recapture

Imagine you purchased a rental property in El Paso in 2015 for $150,000.

Your purchase price was divided into:

• Building value: $130,000
• Land value: $20,000

Land is not depreciated, but the building generally is.

If you claimed approximately $4,727 in annual depreciation for 10 years, your total depreciation would be about $47,270.

At a maximum 25% rate, the potential federal tax on that amount could be approximately $11,818.

This is an illustrative calculation, not a guaranteed tax bill. Your actual tax liability depends on your tax records, adjusted basis, applicable rates, and other factors.

Depreciation recapture is separate from capital gains tax, so both may affect your final tax bill.

How to Calculate Your Adjusted Cost Basis

Before estimating your potential profit, you need to understand your adjusted cost basis.

A simplified formula is:

Adjusted Cost Basis = Original Purchase Price + Capital Improvements − Depreciation

Capital improvements generally add value to the property, extend its useful life, or adapt it to a new use.

Examples include:

• Replacing the roof
• Installing a new HVAC system
• Adding a room or expanding the property
• Completing major renovations
• Making significant structural improvements

Routine maintenance and repairs generally do not increase your cost basis.

For example, replacing a broken appliance or fixing a small plumbing leak is usually treated differently from a major renovation.

Keeping receipts, invoices, and records of improvements can make it easier to calculate your adjusted basis when you sell.

What Is the El Paso Rental Property Market Like?

Before deciding when to sell, it's also important to understand local market conditions.

The original article included the following January 2026 market figures for El Paso investment properties:

Area	Median Sale Price	Average Days on Market
All El Paso	$295,000	72 days
East Side	$245,000	40 days
Northeast	$235,000	54 days
Lower Valley	$190,000	32 days
Horizon and Socorro	$300,000	109 days

The East Side and Lower Valley have traditionally attracted rental property investors because of their price points and rental demand, including demand from military families near Fort Bliss.

However, selling timelines and property values can vary significantly by neighborhood, condition, and pricing.

If you're considering selling, compare your property with recent sales in your specific area rather than relying only on citywide averages.

Can You Avoid Capital Gains Tax With a 1031 Exchange?

A 1031 exchange is one strategy real estate investors may use to defer federal taxes when selling an investment property.

Instead of receiving the proceeds and paying taxes immediately, an eligible investor can reinvest the proceeds into another qualifying investment property under the IRS rules.

A properly structured exchange may defer capital gains and depreciation recapture taxes.

However, a 1031 exchange does not simply eliminate taxes. It generally postpones them until a later taxable sale or other qualifying event.

Important 1031 Exchange Rules

There are several deadlines and requirements to understand:

• 45-day identification period: You generally have 45 days after transferring the original property to identify potential replacement properties.
• 180-day exchange period: You generally have 180 days after transferring the original property to acquire the replacement property, subject to applicable tax filing deadlines.
• Qualified intermediary: You must use a qualified intermediary to handle the exchange proceeds. You generally cannot receive or control the money yourself.
• Like-kind property: The replacement property must meet the applicable investment or business use requirements.
• Reinvestment requirements: To fully defer the gain, you generally need to follow the applicable rules for replacement property value, reinvested proceeds, and debt.

A 1031 exchange has strict requirements, so speak with a qualified intermediary and tax professional before closing on your rental property. Planning ahead is essential because the process must be structured correctly.

What Is an Installment Sale?

Another option mentioned in the original article is an installment sale, sometimes called seller financing.

Instead of receiving the entire purchase price at closing, you allow the buyer to make payments over time under an agreed financing arrangement.

This may allow you to recognize eligible portions of the gain over multiple tax years as payments are received.

For some sellers, spreading out the gain may help manage their taxable income.

However, installment sales involve additional considerations, including buyer qualification, payment terms, interest, and the risk of default. Certain portions of the gain, including depreciation-related amounts, may have different tax treatment.

Before offering seller financing, discuss the structure with a real estate attorney and tax professional.

What If You Convert Your Rental Property Back Into Your Primary Residence?

Some property owners may decide to move back into a rental property before selling it.

Depending on your circumstances, you may qualify for a partial primary residence capital gains exclusion if you meet the ownership and use requirements.

Generally, the federal exclusion requires that you owned and used the property as your primary residence for at least two of the five years before the sale.

However, there are important limitations.

Depreciation claimed or allowable for rental periods after May 6, 1997, generally cannot be excluded and may still be subject to depreciation recapture.

The calculation can also become more complicated if the property was used as a rental and a primary residence during different periods.

If you're considering this strategy, have a CPA review your timeline before making a decision.

What Should El Paso Landlords Do Before Selling?

Selling a rental property involves more than choosing an asking price. You should understand your potential tax liability and estimate how much money you may actually receive after closing.

Here are a few steps to take before listing:

1. Review your purchase records. Find your original closing statement and documents showing your purchase price.
2. Gather improvement receipts. Keep records of major renovations and capital improvements that may affect your adjusted cost basis.
3. Review your depreciation schedule. Look at your tax returns, including Schedule E and Form 4562, to understand the depreciation claimed or allowable.
4. Estimate your selling expenses. Consider agent commissions, title fees, closing costs, repairs, and other expenses.
5. Speak with a CPA. Ask for an estimate of your potential capital gains and depreciation recapture taxes.
6. Explore your options. If you plan to reinvest, ask whether a 1031 exchange may be appropriate for your situation.

Planning before listing can help you make a more informed decision and avoid surprises when tax season arrives.

Frequently Asked Questions

Do I pay capital gains tax when selling a rental property in El Paso?

You may owe federal capital gains tax if you sell the property for more than your adjusted cost basis. Texas does not have a state individual income tax, but federal tax obligations still apply.

How much is depreciation recapture tax?

For certain unrecaptured Section 1250 gains, the federal tax rate can reach a maximum of 25%. Your actual tax liability depends on your depreciation history and individual tax situation.

Can I avoid depreciation recapture with a 1031 exchange?

A properly structured 1031 exchange may defer depreciation recapture and capital gains taxes when you reinvest in qualifying replacement property. It generally defers the taxes rather than eliminating them.

Can I use the $250,000 or $500,000 home sale exclusion on a rental property?

Not automatically. You may qualify for an exclusion if you meet the ownership and primary residence use requirements. However, depreciation from rental periods generally remains subject to separate tax treatment.

How do I calculate my profit when selling a rental property?

Start with the sale price and subtract your adjusted cost basis and applicable selling expenses. Your adjusted cost basis generally includes the original purchase price and qualifying capital improvements, minus depreciation.

A CPA can help determine the taxable gain and account for other applicable adjustments.

Final Thoughts

Selling a rental property in El Paso can be a good opportunity to access your equity, move into another investment, or adjust your real estate portfolio.

But before accepting an offer, make sure you understand the tax implications. Capital gains, depreciation recapture, and other federal tax rules can affect how much of the sale proceeds you actually keep.

Texas offers an advantage because it does not have an individual state income tax. Still, the federal tax side deserves careful planning.

Whether you're selling a property in the East Side, Northeast, Lower Valley, or Horizon City, start by reviewing your numbers and speaking with a qualified tax professional.

The goal is not just to sell your rental property. It's to make a decision that supports your financial plans after the sale.

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