Does Texas recognize 1031 exchanges?
Yes, in the sense that matters: a valid federal 1031 exchange defers all of the income tax an individual owes on a Texas sale, because Texas has no personal income tax. There is no Texas conformity statute to check, no state form to file and no state gain that waits to be taxed later.
The Texas Constitution, Article VIII, Section 24-a, bars a tax on the net incomes of individuals, including their shares of partnership income. So the Texas 1031 exchange question is really a federal one. Section 1031 of the Internal Revenue Code and Treasury Regulation 1.1031(k)-1 set every deadline and requirement.
Federal 1031 rules that apply in Texas
Every Texas exchange must meet the federal requirements in the table. Miss one and the gain generally becomes taxable on your federal return.
- The 1031 exchange rules page walks through each of these with dates, and the 1031 exchange guide covers the types of exchange.
- Weekends and holidays count toward both deadlines, and neither moves to the next business day.
| Rule | What it requires | Source |
|---|---|---|
| Like-kind real property | Investment or business real estate in the U.S. for other U.S. real estate held the same way | IRC 1031(a), (h) |
| Qualified intermediary | Proceeds held by a QI under a written agreement; you can’t touch the cash | Treas. Reg. 1.1031(k)-1(g) |
| 45-day identification | Written, signed list delivered by midnight of day 45 | IRC 1031(a)(3)(A) |
| 180-day closing | Close by day 180 or your return due date with extensions, if earlier | IRC 1031(a)(3)(B) |
| Same taxpayer | The entity that sells must be the one that buys | Treas. Reg. 1.1031(k)-1 |
| Full deferral | Buy equal or greater value, reinvest all net cash, replace the debt | IRC 1031(b) |
Texas withholding at closing and how an exchange affects it
Texas has no state withholding on real estate sales, so there is nothing to waive or reduce when you exchange. A Texas title company will not hold back state tax from a resident or a nonresident seller, exchange or not.
That is one of the simplest parts of a Texas exchange. In California, by contrast, the buyer withholds 3 1/3% of the price by default, and the seller must claim the exchange exemption on Form 593 to avoid it. Texas also bars transfer taxes on real estate sales under Article VIII, Section 29 of its constitution, so there is no state deed tax on either side of the trade.
The federal FIRPTA rule is the exception. A foreign seller generally faces 15% withholding on the amount realized, and an exchange does not remove it automatically. A foreign owner planning an exchange needs an IRS withholding certificate arranged before closing.
Is there a Texas clawback on 1031 exchanges?
No. Texas has no clawback, because it never taxed the gain in the first place. You can sell in Houston and buy in Phoenix, Tampa or anywhere else in the U.S. without a Texas filing.
The clawback question runs the other way for owners coming into Texas. California, Massachusetts, Montana and Oregon track gain deferred on property in their state when it is exchanged for out-of-state property. A California owner who trades a Los Angeles building for a Dallas complex files Form FTB 3840 every year, and California taxes the deferred California gain when the Texas property is later sold in a taxable sale, even if the owner has moved to Texas by then.
Franchise tax for LLCs and partnerships that exchange
The one Texas tax that can touch an exchange is the franchise tax, which applies to LLCs, limited partnerships, corporations and other taxable entities, not to individuals or sole proprietors. For 2026 and 2027 reports the rate is 0.75% of margin for most businesses, or 0.331% under the EZ computation for entities with $20 million or less in total revenue, and no tax is due at $2,650,000 of total revenue or less.
Total revenue is built from specified lines of the entity’s federal return under Comptroller Rule 3.587. Gain that is deferred under Section 1031 is not reported as income on those lines in the year of the exchange, so a full exchange generally keeps the sale gain out of that year’s franchise tax revenue. Boot you recognize is reported, and it can push total revenue up. Have your CPA confirm the franchise tax effect for your entity, especially in a partial exchange.
The same taxpayer rule matters here too. If a Texas LLC sells, that LLC must buy the replacement. A single-member LLC is a taxable entity for franchise tax even though it is disregarded for federal tax, so keep the same structure on both sides.
Does Texas regulate qualified intermediaries?
We found no Texas statute that licenses or bonds qualified intermediaries, so the protection for your exchange funds in Texas comes from the intermediary you choose and the contract you sign. Nine states do have laws covering intermediaries: California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington.
Federal rules still limit who can serve. Your intermediary cannot be your agent in the two years before the sale, such as your attorney, accountant, employee or real estate broker, or a related party. Ask how the funds are held (a separate account in your name or a qualified escrow), whether withdrawals need your signature, and what fidelity bond and errors and omissions coverage the firm carries. Our 1031 qualified intermediary guide has a checklist.
Common 1031 exchange paths in Texas
Texas exchanges fall into a few patterns, and the state tax result is the same in each for an individual Texas resident: nothing due to Texas.
- Texas to Texas: selling an older building in one metro, such as Houston or San Antonio, and buying a newer or larger one in Dallas-Fort Worth or Austin. No state filing in either direction.
- Texas out of state: a Texas resident selling here and buying in another state. If the new state taxes income, the replacement property’s future rents, and a later taxable sale, may be taxed there.
- Into Texas from a clawback state: California, Massachusetts, Montana or Oregon owners trading into Texas keep their home state’s tracking and filing duties.
- Into a DST or other passive interest: owners who want out of management can identify a Delaware statutory trust interest as replacement property. Our 1031 exchange DST guide covers the trade-offs.
- Reverse exchange: buying the Texas replacement first through an exchange accommodation titleholder, then selling within 180 days.
Worked example: a $2 million Texas 1031 exchange
A married couple sells a 16-unit building in Fort Worth for $2,000,000 in 2026. Selling costs are $100,000, so the amount realized is $1,900,000. Their adjusted basis is $820,000 after $380,000 of depreciation, so the gain is $1,080,000. The $900,000 mortgage is paid at closing and the intermediary holds the remaining $1,000,000.
Full exchange: they buy a $2,300,000 building in Austin with the $1,000,000 of exchange funds and a $1,300,000 loan. The price is above the $1,900,000 amount realized, all the cash is reinvested and the new debt exceeds the old, so all $1,080,000 of gain is deferred. On their federal return that avoids about $276,040 of tax for 2026: $95,000 on the $380,000 of unrecaptured Section 1250 gain at 25%, $140,000 on $700,000 of long-term gain at 20% and $41,040 of net investment income tax. Texas tax either way: $0.
Partial exchange: instead they take $150,000 in cash and use $850,000 of exchange funds plus a $1,450,000 loan on the same building. The larger loan does not offset cash received, so they have $150,000 of boot. It is taxed first as unrecaptured Section 1250 gain at 25%, $37,500, plus 3.8% net investment income tax of $5,700, for $43,200 of federal tax. The other $930,000 of gain stays deferred, and their basis in the new building is $1,370,000.
The 1031 exchange calculator runs these steps with your numbers.
Property tax on a Texas replacement property
If your replacement is in Texas, budget for property tax at the full combined local rate on the price you pay. Texas averages 1.40% on homes in the Tax Foundation’s 2026 figures, but apartments get no homestead exemption and often pay more than 2% of value in the large metros.
A sale also ends any 20% circuit breaker limit the seller had, and you can’t claim that limit until you have owned the building since January 1 of the prior tax year. The limit is authorized only through the 2026 tax year unless the Legislature extends it. Our guide to the property tax rate in Texas has county rates and a worked example on NOI.
Texas timeline tips
The 45-day and 180-day clocks start on the day your Texas sale closes, so your buyer’s timing sets your deadlines. Sign the exchange agreement and assign the contract to the intermediary before closing; you can’t start an exchange after the money reaches you.
Texas weather can move the dates. When the IRS announces disaster relief for Texas counties after a hurricane or flood, it can postpone the 45-day and 180-day deadlines under Revenue Procedure 2018-58 for affected taxpayers. Read the notice for your county instead of assuming relief applies.
Skyline buys apartment buildings with five or more units in Texas. We buy directly, close on your timeline, and can work inside 1031 deadlines. We can set a closing date that gives you room to find a replacement first, and we work with your intermediary on the assignment.
Selling? Spread the tax with seller-carry terms
If a large tax bill is what is keeping you from selling, an installment sale may help. When you carry part of the price as a note, the gain is generally reported as you receive payments instead of all in the year of sale. Some parts of the gain, such as certain depreciation recapture, can still be due up front, so run the numbers with your CPA first.
Skyline Capital Investments buys apartment buildings with five or more units and can offer seller-carry terms, or a delayed closing that fits your 1031 timeline. Send the address and unit count and we typically respond within 48 hours. How seller financing works · How an installment sale is taxed · Seller financing calculator.
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