A 1031 exchange in Texas lets real estate investors sell an investment property and reinvest the proceeds into like-kind property while deferring the tax on the gain. The exchange rules are federal and apply the same way in every state. What sets Texas apart is the tax math on either side of the deal: Texas has no state income tax, so the only tax a Texas exchange defers is federal. That makes Texas one of the most active 1031 markets in the country, both for investors selling Texas property and for investors in high-tax states reinvesting here. We act as your qualified intermediary, holding the proceeds and handling the documentation so the exchange stays valid from sale to closing.
Table of contents
- What is a 1031 exchange?
- Is there a capital gains tax on real estate in Texas?
- The federal taxes a Texas 1031 exchange defers
- Texas 1031 exchange rules and timeline
- Why your 1031 exchange needs a qualified intermediary
- 1031 exchanges across Texas markets
- Selling out of state and buying Texas replacement property
- Common Texas 1031 exchange mistakes
- Start your Texas 1031 exchange
- Frequently asked questions
What is a 1031 exchange?
A 1031 exchange, named for Section 1031 of the Internal Revenue Code, allows you to defer federal capital gains tax when you sell investment or business real estate and reinvest in like-kind real property. Instead of recognizing the gain at the sale, you roll it into the replacement property, and the deferred tax carries into that property's basis. To defer the full gain, the replacement property must be of equal or greater value, you must reinvest all the net proceeds, and you must replace the debt that was on the relinquished property. The same taxpayer that sold must acquire. A qualified intermediary has to hold the funds throughout, because if you take receipt of the proceeds, the exchange fails. Our main 1031 exchange guide covers the full federal framework; this page focuses on how it works in Texas.
Is there a capital gains tax on real estate in Texas?
No. Texas does not levy a personal income tax, and a 2019 constitutional amendment (Proposition 4) prohibits the state from imposing one without statewide voter approval. Because capital gains are a form of income, there is no Texas state capital gains tax on a real estate sale, for residents and non-residents alike.
It also means Texas has no state withholding at closing. States like California (3.33% of the sale price), New York (an estimated payment through Form IT-2663), and Hawaii (7.25% under HARPTA) require the closing agent to withhold state tax when you sell, and you have to apply for an exemption to avoid it inside an exchange. Texas requires none of that. The state side of a Texas exchange is clean, which means the tax you defer in a Texas 1031 is entirely federal.
The federal taxes a Texas 1031 exchange defers
No state tax does not mean no tax. When you sell appreciated investment real estate, the federal bill alone is what makes the exchange worthwhile:
- Long-term capital gains at 0%, 15%, or 20%. For 2026 the 20% rate applies above $545,500 of taxable income for single filers and $613,700 for married couples filing jointly, so most sizable commercial gains land at 20%.
- The 3.8% Net Investment Income Tax, which applies once modified adjusted gross income passes $200,000 (single) or $250,000 (married filing jointly).
- Depreciation recapture on the real property you have written off, taxed as unrecaptured Section 1250 gain at up to 25%.
On a property held for years, those three together can take 30% or more of the gain. A properly structured Texas 1031 defers all of it and keeps that capital working in the replacement property.
Texas 1031 exchange rules and timeline
The federal rules govern every Texas exchange, and the deadlines are strict and rarely extended:
- 45-day identification. You have 45 days from the sale of your relinquished property to identify replacement property in writing, generally under the three-property rule, the 200% rule, or the 95% rule.
- 180-day closing. You must close on the replacement property within 180 days of the sale, or by your tax return due date including extensions, whichever is earlier.
- No constructive receipt. The proceeds must go to your qualified intermediary, never to you, between the two closings.
- Equal or greater value and debt. To defer the entire gain, reinvest all net proceeds and match or exceed the relinquished property's value and debt. Anything you pull out, in cash or reduced debt, is boot and is taxable.
- Same taxpayer. The entity that sold must be the entity that buys.
The exchange is reported to the IRS on Form 8824 for the tax year of the sale.
Why your 1031 exchange needs a qualified intermediary
A 1031 exchange is only valid if a qualified intermediary holds the sale proceeds and facilitates the transaction. You cannot take possession of the funds, and the intermediary cannot be a disqualified person such as your agent, attorney, or a relative. The intermediary prepares the exchange agreement, holds the funds in a secure account between closings, and coordinates with the title companies on both ends.
This is where the choice of intermediary matters, because your funds sit with them during the exchange. We hold exchange funds in segregated, bonded accounts and work with you directly from your first call through closing.
1031 exchanges across Texas markets
Texas exchange demand concentrates in four metros, and a single exchange can move capital across any of them, since like-kind is broad for real property.
Houston draws exchange activity in industrial and warehouse, multifamily, and net-lease retail, supported by the energy sector and port logistics. Dallas-Fort Worth is one of the strongest multifamily and commercial markets in the country, fueled by corporate relocations and population growth. Austin attracts investors focused on appreciation and tech-driven demand, often trading into multifamily and mixed-use. San Antonio offers steadier yields and lower entry prices, with demand anchored by the military and medical sectors. Whether you are exchanging within one metro or selling in one and buying in another, the Texas tax treatment is the same: no state tax on the gain.
Selling out of state and buying Texas replacement property
A large share of Texas exchange volume is investors selling in high-tax states and reinvesting here, drawn by zero state tax on future rental income and on the eventual sale, plus sustained job and population growth.
One point is critical if this is you: state tax consequences attach to the sale, so they are governed by the state you are selling out of, not the state you are buying into. Selling a rental in California and buying in Texas does not erase the California tax. You still face California withholding at the California closing, and California's clawback follows you through an annual Form FTB 3840 filing for as long as you hold the Texas property, taxing the deferred California-source gain when you eventually sell without exchanging again. Texas being tax-free protects the income and the back-end sale, not the front-end exit. Our California to Texas guide covers this in full.
Build the Texas property tax line into your underwriting as well. Texas funds itself largely through property tax rather than income tax, with effective rates that commonly run between roughly 1.6% and 2.3% of assessed value, and properties are typically reassessed at purchase. The state income tax saving is real, but part of it is recovered through carrying cost, so model it before you commit.
Common Texas 1031 exchange mistakes
- Taking receipt of the proceeds, even briefly, which disqualifies the exchange.
- Missing the 45-day identification window, the single most common failure.
- Trading down or pulling cash out, which creates taxable boot.
- Breaking the same-taxpayer rule by changing the holding entity between sale and purchase.
- Underwriting a Texas replacement property on its headline cap rate without the property tax reassessment, which overstates the yield.
- Assuming no Texas withholding means no withholding at all. A foreign seller still faces federal FIRPTA withholding of 15% of the sale price, which has to be managed with a withholding certificate alongside the exchange.
Start your Texas 1031 exchange
Set up your exchange before your relinquished property closes, so the proceeds never reach your hands and the 45-day and 180-day clocks start clean. Contact our team to begin, or to talk through a specific deal.
Frequently asked questions
Can I do a 1031 exchange in Texas?
Yes. The federal 1031 rules apply in Texas exactly as they do nationwide, and Texas adds no state tax on the gain. You sell investment or business real estate, identify replacement property within 45 days, close within 180, and use a qualified intermediary throughout.
Does Texas have a capital gains tax on real estate?
No. Texas has no state income tax, and capital gains are treated as income, so there is no state capital gains tax on a property sale. Federal capital gains tax still applies.
Is there state withholding when I sell Texas property?
No. Texas has no state-level real estate withholding, unlike California, New York, or Hawaii. The only withholding that can apply is federal FIRPTA, and only when the seller is a foreign person.
How long do I have to complete a Texas 1031 exchange?
You have 45 days from the sale to identify replacement property in writing, and 180 days from the sale to close, or your tax return due date including extensions, whichever comes first.
Do I need a qualified intermediary for a Texas 1031 exchange?
Yes. A qualified intermediary must hold the proceeds and facilitate the exchange. If you take receipt of the funds, the exchange is disqualified, and the intermediary must be engaged before the relinquished property closes.
Can I do a 1031 exchange from California into Texas?
Yes, and it is common. The federal and California tax is deferred at the time of the exchange, but California requires an annual FTB 3840 filing afterward and taxes the deferred California-source gain when you sell the Texas property without exchanging again.
Can a foreign investor do a 1031 exchange in Texas?
Yes. The exchange rules are the same, but FIRPTA's 15% federal withholding has to be handled with a withholding certificate so it does not break the exchange.
What property qualifies for a Texas 1031 exchange?
Real property held for investment or business use. A primary residence, a vacation home without genuine rental use, and property held primarily for resale (fix-and-flip inventory) do not qualify.
This page is general information, not tax or legal advice. We act as a qualified intermediary and do not provide tax or legal advice. Federal thresholds and rules change; confirm current figures with your tax advisor.
