1031 Exchange in Texas
Texas imposes no state income tax — the Texas Constitution (Article VIII, Section 24-a, approved by voters in 2019) prohibits one — so a 1031 exchange in Texas involves only federal capital gains deferral under IRC Section 1031. There are no additional state-level exchange rules, forms, or filings.
Fast Facts
- State Capital Gains Rate
- None. Texas has no state income tax, and the Texas Constitution (Art. VIII, Sec. 24-a, added by Proposition 4 in November 2019) prohibits the Legislature from enacting one on individuals.
- Conforms to Federal 1031
- Not applicable in the usual sense — because Texas has no income tax, there is no state-level gain to defer. Only federal 1031 rules apply.
- Additional Transfer Tax
- None. Texas does not impose a real estate transfer tax, and the Texas Constitution (Art. VIII, Sec. 29) prohibits a tax on the sale, exchange, or gift of real property. Standard county recording fees still apply.
- Local Deadlines/Forms
- Federal deadlines only: 45 days to identify replacement property and 180 days to complete the exchange. No state exchange forms are required.
- Qualified Intermediary Requirements
- Texas has no state licensing or registration regime for qualified intermediaries; QIs operate under the federal safe harbor in Treas. Reg. 1.1031(k)-1(g)(4). Because no agency oversees QIs, vet fidelity bonding, E&O coverage, and fund-segregation practices yourself.
Legislative Updates
Senate Bill 4 (2025) / Proposition 13: Homestead Exemption Increased to $140,000
Voters approved Proposition 13 in November 2025, raising the school district homestead exemption from $100,000 to $140,000 ($150,000 for seniors). Note this applies only to owner-occupied primary residences — investment properties held in a 1031 exchange do not qualify for the homestead exemption.
Senate Bill 2 (2019): Texas Property Tax Reform and Transparency Act
Lowered the voter-approval (formerly rollback) property tax rate for most cities and counties from 8% to 3.5%, requiring an automatic election for rate increases above that threshold. This makes year-over-year property tax levy growth more predictable for investors underwriting Texas properties.
Legal and Tax Considerations
State Capital Gains Rate
None. Texas has no state income tax; the Texas Constitution (Art. VIII, Sec. 24-a) prohibits an individual income tax.
Conforms to Federal 1031
Only federal 1031 rules apply — with no state income tax, there is no state-level gain to defer and no state clawback risk on Texas-sourced gains.
Additional Transfer Tax
None. Texas imposes no real estate transfer tax (prohibited by Tex. Const. Art. VIII, Sec. 29); only county recording fees apply.
Local Deadlines/Forms
Federal deadlines only: 45-day identification and 180-day completion. No state exchange forms.
Qualified Intermediary Requirements
No state licensing or registration requirement for QIs in Texas. QIs follow the federal safe-harbor rules; perform your own due diligence on bonding, insurance, and segregated escrow accounts.
Required Documentation
- Federal Form 8824
- Complete closing statements for both properties
Clawback Rule
None
Step-by-Step Process
- 1
Engage a Qualified Intermediary Before Closing
A QI must hold the exchange proceeds — you cannot take receipt of the sale funds. Texas has no state QI regulation, so verify bonding, errors-and-omissions insurance, and segregated accounts before signing an exchange agreement.
- 2
Identify Replacement Property Within 45 Days
You must identify potential replacement properties in writing within 45 days of selling your relinquished property. When evaluating Texas properties, factor in county property tax rates and local land-use rules.
- 3
Close on Replacement Property Within 180 Days
Complete the purchase of your replacement property within 180 days of the sale of your relinquished property (or your tax return due date including extensions, if earlier).
- 4
File Federal Form 8824
Report the exchange on Form 8824 (Like-Kind Exchanges) with your federal return for the year of the exchange. Texas has no state income tax return to file.
- 5
Review the Property Tax Assessment
Texas relies heavily on property taxes and has one of the higher effective property tax rates in the country (Tax Foundation data puts the effective rate on owner-occupied housing at roughly 1.4%, with combined local rates exceeding 2% in some jurisdictions). Review the appraisal district's assessed value after acquisition and protest it if it is overstated.
- 6
Check Local Land-Use Rules
Land-use regulation varies widely between Texas municipalities — Houston famously has no conventional zoning ordinance, while cities like Austin apply more detailed land development codes. Confirm your intended use is permitted before closing.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Common Pitfalls
Not considering property tax implications
Issue
Because Texas has no income tax, it relies heavily on property taxes and ranks among the highest states for effective property tax rates (roughly 1.4% of owner-occupied housing value per the Tax Foundation, higher in many urban counties). A sale can also trigger reassessment toward the purchase price, raising the tax bill above what the seller was paying.
Prevention
Underwrite using the property tax the county will assess after your purchase, not the seller's current bill. Review appraisal district values annually and protest overstated assessments.
Ignoring local land-use regulations
Issue
Land-use rules vary significantly between Texas municipalities — Houston has no conventional zoning code, while Austin and many suburbs apply detailed development regulations.
Prevention
Verify that your intended property use is permitted under local ordinances. Consult a local real estate attorney and review the municipality's development code before committing to a replacement property.
Underestimating out-of-state management challenges
Issue
Many investors exchanging into Texas from other states underestimate the cost and effort of managing property remotely and building a reliable local team.
Prevention
Line up local property management and real estate professionals before completing the exchange, and include management costs in your projections.
Not understanding regional market differences
Issue
Texas is a large state with distinct regional markets. Dallas-Fort Worth, Houston, Austin, and San Antonio have different economic drivers, and assumptions from one metro do not automatically transfer to another.
Prevention
Research each market independently and consider working with professionals who know the specific metro area.
Frequently Asked Questions
Does Texas conform to federal 1031 exchange rules?
Texas has no state income tax, so only the federal Section 1031 rules apply. There is no state-level gain to defer, no state exchange filing, and no state clawback on Texas-sourced deferred gains.
What forms do I need to file for a 1031 exchange in Texas?
You only need to file federal Form 8824 (Like-Kind Exchanges) with your federal tax return. Texas has no state income tax return.
Are there any state-specific considerations for 1031 exchanges in Texas?
While Texas has no state income tax, you should consider property tax rates (among the highest in the nation) and local land-use regulations when evaluating replacement properties. Texas also has no state oversight of qualified intermediaries, so vet your QI carefully.
Major Cities
Houston, Dallas, Austin, San Antonio, Fort Worth
References
Official References
- IRS – Like-Kind Exchanges (Real Estate Tax Tips)
- IRS – About Form 8824, Like-Kind Exchanges
- Texas Constitution, Art. VIII, Sec. 24-a – prohibition on individual income tax
- Texas Comptroller of Public Accounts – Property Tax
- Tax Foundation – Texas Tax Rates & Rankings
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.