Selling a Rental in a No-Income-Tax State: What You Still Owe

The federal bill is the same in every state, and it is most of the tax

Federal tax does not depend on where the property is. Depreciation you took is taxed first as unrecaptured section 1250 gain at ordinary rates capped at 25 percent. The remaining long-term gain is taxed at 0, 15 or 20 percent; Rev. Proc. 2025-32 puts the 2026 top of the 15 percent band at $613,700 for joint filers and $545,500 for single filers. Section 1411 adds 3.8 percent above modified AGI of $250,000 joint or $200,000 single.

On a large gain those layers can approach a quarter of the gain, which is why owners in no-tax states still exchange. Capital gains tax on a rental works the federal layers in order, and does a 1031 defer depreciation recapture confirms the exchange defers them all.

Where you live decides the state income tax, not where the rental is

States that tax income generally tax residents on all of it. California's tax agency puts it directly on its residency page: residents are taxed on all income regardless of source. A California resident who sells a rental in Texas owes California tax on the gain at California's ordinary rates, with no Texas tax to credit against it.

The reverse also matters. A resident of a no-tax state who sells a rental located in a taxing state generally owes that state tax as a nonresident, and many collect it through withholding at closing; states that withhold at closing lists them.

Moving changes the answer. If you sell after becoming a resident of a taxing state, that state taxes the gain as a resident's income, including appreciation that built up while you lived somewhere without an income tax. Timing the move and the sale is a planning point to settle with your CPA.

Washington taxes capital gains, but not on real estate; the excise tax at closing is the cost

RCW 82.87.040 imposes a 7 percent excise tax on individuals' long-term capital gains and, from January 1, 2025, an additional 2.9 percent on gains over $1,000,000. RCW 82.87.050 exempts all real estate transferred by deed or real estate contract, and exempts gain on an interest in a privately held entity to the extent it comes from real estate the entity owns directly.

The real estate excise tax is the Washington cost. The Department of Revenue lists the state portion for 2023 through 2026 as 1.10 percent up to $525,000, 1.28 percent to $1,525,000, 2.75 percent to $3,025,000 and 3 percent above, with local REET added on top; the tiers rise on January 1, 2027. The seller usually pays. Washington REET and the 1031 covers how exchanges are treated.

Washington's no-income-tax status is also changing. The Department of Revenue says a 9.9 percent income tax on individuals and joint filers with adjusted gross income over $1 million takes effect January 1, 2028, with the first returns due in 2029.

Transfer taxes in the other no-tax states run from none to 1.5 percent of the price

The state income tax may be zero, but the deed is not free in most of these states.

These taxes are charged on the deed or the price, not on the gain, so budget them as a cost of a sale and of an exchange alike.

• Texas: the constitution bars a tax on individuals' net incomes (Art. VIII, section 24-a), a capital gains tax on individuals (section 24-b, added November 2025) and a transfer tax on conveyances of fee simple title (section 29).
• Florida: the constitution bars a state income tax on resident individuals; the documentary stamp tax is 70 cents per $100 of consideration, 60 cents in Miami-Dade.
• New Hampshire: the interest and dividends tax in RSA chapter 77 was repealed effective January 1, 2025; the real estate transfer tax is $.75 per $100 and applies to both buyer and seller.
• South Dakota: the Department of Revenue says the state imposes no income tax; the transfer fee is 50 cents per $500 of value, paid by the grantor.
• Tennessee: the Hall income tax on interest and dividends was repealed for periods beginning January 1, 2021; the realty transfer tax is paid by the grantee.

Worked example: a $1,200,000 Washington rental sale

Hypothetical, round figures. A Washington resident sells a rental in 2026 for $1,200,000 with a $500,000 gain, $150,000 of it from depreciation. Washington's capital gains excise tax does not apply because the asset is real estate. The state REET is 1.10 percent of $525,000, or $5,775, plus 1.28 percent of the next $675,000, or $8,640, for $14,415 before the local portion.

The federal tax on the $500,000 gain is the large number: up to 25 percent on the $150,000 depreciation layer, 15 or 20 percent on the $350,000 balance depending on other income, and 3.8 percent on the part of modified AGI over the threshold. An exchange would defer the federal tax but not the REET. Run your own numbers with your CPA.

Exchanging from a no-tax state still defers the federal tax, and may matter more later

The section 1031 deferral is federal, so it is worth the same in Texas as in California. Replacement property can be in any state, including a fractional interest in a traditional DST holding property elsewhere.

Deferred gain does not disappear. If you later live in a taxing state when the replacement property is sold, that state may tax the whole deferred gain as a resident's income; does a 1031 defer state capital gains tax and exchanging into another state cover the tracking rules some states apply. The Texas, Florida and Washington state pages hold the local detail.