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Lakefront Seller Strategy Guide
How Lake Travis and Lake LBJ Owners Can Plan Ahead and Potentially Reduce Capital Gains Taxes
Owning a lakefront property in Central Texas has been an incredible investment for many homeowners. Over the past decade, waterfront homes across Lake Travis, Lake LBJ, and the Highland Lakes have seen significant appreciation.
That growth creates opportunity—but it can also create a large capital gains tax bill if a property is sold without planning ahead.
What many homeowners don’t realize is that some of the most effective strategies for reducing or deferring taxes require planning years before selling, not weeks.
Whether you're thinking about selling in the next year or the next five years, understanding the options available can make a major difference in your financial outcome.
What Are Capital Gains Taxes?
When you sell a property for more than you originally paid for it, the profit is called a capital gain. That gain may be subject to federal capital gains taxes.
The basic formula typically looks like this:
Sale Price
– Original Purchase Price
– Major Improvements
– Selling Costs
= Taxable Gain
For waterfront properties purchased years ago, the appreciation can be significant.
Example:
- Purchase Price: $600,000
- Sale Price: $1,400,000
- Gain: $800,000
Depending on income levels, long-term capital gains may be taxed at 15% or 20%, plus a potential 3.8% Net Investment Income Tax.
The good news for Texas homeowners is that Texas does not have a state income tax, which means capital gains taxes are typically limited to federal taxes.
Still, planning ahead can significantly reduce or defer the amount owed.
The Primary Residence Capital Gains Exemption
One of the most valuable tax advantages available to homeowners is the Primary Residence Exclusion.
Homeowners may exclude:
- Up to $250,000 in gains if single
- Up to $500,000 in gains if married filing jointly
To Qualify, Homeowners Must Generally:
- Own the home for at least two of the last five years
- Live in the home as a primary residence for at least two of the last five years
For some lakefront owners, this creates an opportunity to convert a lake property into their primary residence before selling.
In certain situations, living in the property for a period of time before selling could allow a portion of the gains to be excluded from taxation.
Converting a Vacation Home Into an Investment Property
Another strategy some homeowners explore is converting a second home or vacation property into an investment property before selling.
This typically involves:
- Renting the property
- Holding it as an investment
- Selling at a later date
Once classified as an investment property, it may qualify for additional strategies, including a 1031 Exchange.
What Is a 1031 Exchange?
A 1031 Exchange allows real estate investors to defer capital gains taxes by reinvesting proceeds from one investment property into another qualifying investment property.
Instead of paying taxes at the time of sale, the gain is deferred into the new property.
Replacement Properties Could Include:
- Another waterfront property
- Rental homes
- Multi-family properties
- Commercial real estate
- Multiple smaller investments
These exchanges have strict timelines and requirements, so planning ahead with a tax professional is essential.
Buying a Future Home as an Investment Property
Some buyers take a long-term approach by purchasing a property today that they may want to live in later.
This strategy may involve:
- Buying as an investment property
- Renting the property
- Holding for appreciation
- Converting to a primary residence later
This approach can allow homeowners to:
- Lock in today's prices
- Generate rental income
- Maintain long-term flexibility
Helping Family Members Build Wealth
Real estate sales can also create opportunities to help family members build long-term financial security.
Some families choose to:
- Help children purchase their first home
- Help family members invest in real estate
- Co-invest in rental properties
- Transfer property through estate planning strategies
In some situations, property passed through inheritance may receive a step-up in basis, meaning the value resets to current market value at the time of inheritance. This can significantly reduce capital gains taxes for heirs.
Because these strategies involve estate planning considerations, they should always be reviewed with qualified professionals.
Why Timing and Planning Matter
Many homeowners focus only on timing the real estate market.
But when selling highly appreciated lakefront property, tax strategy can sometimes be just as important as sale price.
Two homeowners might sell identical lake houses for the same price, but their financial outcomes could look very different depending on the strategy used before selling.
Planning ahead allows homeowners to explore options such as:
- Primary residence exclusions
- Investment property strategies
- 1031 exchanges
- Estate planning considerations
- Long-term reinvestment opportunities
Most effective strategies require 2–5 years of planning before a sale occurs.
Planning Your Lakefront Exit Strategy
If you own property on Lake Travis, Lake LBJ, or the Highland Lakes, it can be helpful to start evaluating your options well before you decide to sell.
Early planning can help homeowners:
- Understand current equity position
- Evaluate potential tax exposure
- Identify possible strategies for deferring gains
- Prepare property for maximum resale value
- Coordinate with tax and financial professionals
Having a clear plan in place can make the selling process smoother and potentially improve your financial outcome.
Thinking About Selling in the Future?
Even if you're not planning to sell immediately, starting the conversation early can help you understand what options may be available.
If you own lakefront property and would like to discuss market conditions or long-term selling strategies, feel free to reach out.
Disclaimer
The information provided on this page is for general educational purposes only and is not intended to provide legal, tax, or financial advice. Tax laws and regulations are complex and subject to change, and individual circumstances vary.
Before making any decisions related to selling property, capital gains taxes, estate planning, or investment strategies, you should consult with a qualified CPA, tax professional, financial advisor, or real estate attorney who can evaluate your specific situation.
Real estate strategies such as converting a property to a primary residence, rental use, or completing a 1031 exchange involve specific eligibility requirements and timelines that should be reviewed with a licensed professional.
Brooke LeMond and The Lakefront Group do not provide tax or legal advice. Any examples provided are illustrative only and should not be relied upon as a substitute for professional guidance.