Tax
Taxes on rental income in Texas
"Texas has no income tax" is true for individuals, and it is written into the state constitution. It does not mean rental income is untaxed. Federal income tax still applies, an entity that owns rentals can owe or file for the Texas franchise tax, short stays carry hotel tax, and property tax is the largest state-level cost of all. This guide sorts out which taxes apply to whom.
Not tax advice. Federal tax rules change with new legislation and IRS guidance, and entity questions depend on your facts. Use this guide to prepare questions for a CPA or tax attorney.
The map: which taxes apply
| Tax | Applies to | Key point |
|---|---|---|
| Texas personal income tax | No one | The Texas Constitution (Article VIII, §24-a, added in 2019) prohibits a tax on individuals' net incomes, including their share of partnership income |
| Texas capital gains tax on individuals | No one | A 2025 amendment (Article VIII, §24-b) prohibits a state tax on the realized or unrealized capital gains of an individual, family, estate or trust |
| Federal income tax | Every owner with net rental income or gain | Reported on the federal return; rules below |
| Texas franchise tax | Taxable entities such as LLCs, limited partnerships and corporations | Most small entities owe nothing but must still file an information report |
| Hotel occupancy tax | Rentals to guests staying less than 30 consecutive days | 6% state rate plus local taxes |
| Property tax | Every owner | Local, annual, and usually the largest recurring tax |
Federal income tax on rentals
IRS Publication 527 covers residential rental property. The main points:
- Reporting. Individuals generally report rental income and expenses on Schedule E of Form 1040. A multi-member LLC taxed as a partnership files its own return and issues Schedules K-1.
- Deductible expenses include mortgage interest, property tax, insurance, repairs, management fees, utilities you pay, and depreciation.
- Depreciation. Residential rental buildings are generally depreciated over 27.5 years; nonresidential real property over 39 years. Land is not depreciable, so the purchase price must be split between land and building.
- Repairs and improvements. Repairs are generally deducted when paid; improvements are capitalized and depreciated.
- Passive activity rules. Rental activities are generally passive. IRS Publication 925 describes a special allowance of up to $25,000 of rental losses for owners who actively participate, phased out as modified adjusted gross income rises from $100,000 to $150,000, and a separate treatment for qualifying real estate professionals.
- Net investment income tax. Higher-income owners may owe the 3.8% net investment income tax on rental income and gains.
- Personal use. A property you also use personally, such as a vacation home, has allocation rules and limits on deductions.
Property tax on a rental is deducted as a rental expense. The federal cap on itemized state and local tax deductions applies to personal itemized deductions, not to taxes deducted as expenses of a rental activity.
When you sell
- Gain is the amount realized minus your adjusted basis, which is reduced by the depreciation you took or were allowed to take.
- Depreciation recapture. The part of the gain from depreciation on real property is generally taxed at a maximum federal rate of 25% (unrecaptured Section 1250 gain), with the rest at long-term capital gains rates if held more than a year.
- No Texas tax on the gain for an individual, under the state constitution.
- Deferral. A Section 1031 exchange can defer the federal gain. See 1031 exchanges for Texas property.
The Texas franchise tax and rental entities
The franchise tax is a privilege tax on taxable entities formed in, or doing business in, Texas (Tax Code Chapter 171). For a rental owner, the question is which structure holds the property:
| Owner | Franchise tax status |
|---|---|
| Individual (sole proprietor) | Not a taxable entity |
| General partnership owned entirely by natural persons, without limited liability | Not a taxable entity |
| LLC, including a single-member LLC | Taxable entity, even if disregarded for federal income tax |
| Limited partnership | Taxable entity, unless it qualifies as a passive entity |
| Corporation | Taxable entity |
Why most rental LLCs are not "passive entities"
Some online guides say a rental LLC qualifies for the passive entity exclusion. Under Section 171.0003, only a general or limited partnership or a non-business trust can be a passive entity, and it must receive at least 90% of its federal gross income from listed sources such as dividends, interest and capital gains. The statute expressly says that income does not include rent. A rental LLC therefore generally remains a taxable entity.
What that means in practice
- No tax due threshold. The Comptroller lists a no-tax-due threshold of $2.65 million in annualized total revenue for 2026 and 2027 reports. An entity at or below it owes no franchise tax.
- Still file. Entities at or below the threshold must still file a Public Information Report or an Ownership Information Report.
- Due date. Annual reports are due May 15, moving to the next business day when that falls on a weekend or holiday.
- Rates above the threshold. The Comptroller lists 0.75% for most entities and 0.375% for qualifying retailers and wholesalers, applied to taxable margin.
- Consequences of not filing. Missing reports can lead to penalties and, eventually, to forfeiture of the entity's right to transact business. See LLCs for rental property.
Short-term rentals and hotel tax
Renting a residence to guests for less than 30 consecutive days is treated as a hotel for hotel occupancy tax. The state rate is 6%, and cities and counties add their own. Owners may need to register and report even when a platform collects some of the tax. The details, and how Austin, San Antonio, Houston and Dallas regulate short-term rentals, are in Texas short-term rental rules by city.
Property tax is the big one
Without an income tax, Texas relies heavily on property tax to fund local government and schools, and rental property has no homestead exemption. Every year, check your appraisal, consider a protest, and budget for the bill. See Texas property taxes for rental owners and how to protest an appraisal.
Common questions
Do I pay Texas state tax on rental income?
Not as an individual. Texas has no personal income tax. If the property is owned by an LLC or another taxable entity, the franchise tax applies to the entity, though most small rental entities owe nothing and file an information report.
Is an out-of-state owner of Texas rental property taxed by Texas on the income?
Texas does not tax individuals' income. The owner's home state may tax the income under its own rules, and federal tax applies regardless.
Does a single-member LLC owe Texas franchise tax?
It is a taxable entity. It owes tax only if its revenue exceeds the no-tax-due threshold and it has taxable margin, but it must still file an annual information report.
Are Texas cities allowed to tax my rental income?
Texas cities do not levy income taxes. Local taxes that affect rentals are property tax and, for short stays, local hotel taxes.
Related guides
- Texas LLCs for rental property
- 1031 exchanges for Texas property
- Texas property taxes for rental owners
Official sources: IRS Publication 527 and Texas Comptroller, franchise tax.
Last reviewed 2026-09-17