1031 Exchange Rules in Texas

Last reviewed: June 2026. State rules change. Verify current rules before closing.

What Is Different in Texas

Texas is one of the simplest states in the country for a 1031 exchange. There is no state income tax, no state capital gains tax, no withholding at closing, and no state exchange paperwork. So why exchange at all? Because the federal government still wants its share, and on a typical investment property sale that share can exceed 28% of your gain. Everything a Texas investor defers in a 1031 exchange is federal, and the federal bill is usually bigger than people expect.

Does Texas Conform to IRC Section 1031?

There is nothing to conform to. Texas has no personal income tax, so the state takes no position on your exchange. A 1031 exchange is an IRS-approved way to sell investment property and buy replacement property without paying tax on the gain right away. In Texas, the exchange is purely a federal matter. Our 1031 exchange guide walks through how it works.

One housekeeping note for entity owners: Texas has a separate franchise tax that applies to some business entities based on revenue. It is not a tax on your sale, but ask your CPA how a large disposition affects your entity's reporting.

Texas Tax Rate on Real Estate Gains

Zero. Texas does not tax individual income or capital gains. Compare that with California at up to 13.3% or New York at up to 10.9%, and you see why so many investors exchange into Texas property.

Withholding at Closing

None. Texas has no withholding requirement on real estate sales, for residents or nonresidents. Your closing in Texas looks the same whether you live in Dallas or Denver. No exemption forms, no state certificates, no waiting on a state refund.

Federal Taxes Still Apply

This is the section that matters in Texas. Without an exchange, a sale faces three federal layers.

Example: $1,000,000 sale of a Texas rental. Original purchase $600,000, with $100,000 of depreciation taken, so the adjusted basis is $500,000 and the total gain is $500,000.

Figures are illustrative and rounded. Your rates depend on income, filing status, and basis. Depreciation recapture is the tax on the depreciation deductions you took while renting the property, and it stings because it applies even when the property barely appreciated. A qualifying 1031 exchange may defer all three federal layers. Run your numbers with our 1031 exchange calculators, then confirm them with your tax advisor.

Crossing State Lines

Texas gets interesting when another state is involved.

• Selling in another state, buying in Texas. The other state's rules apply at your sale closing. Sixteen states withhold at closing, and most have an exemption form your QI helps coordinate.
• Bringing deferred gain into Texas. Some states keep taxing gain that left. California is the big one: exchange California property into Texas property and you must file California Form FTB 3840 every year, and California can tax the deferred gain when you eventually cash out. Moving to Texas does not erase it.
• Selling in Texas, buying in a tax state. No Texas tax now, but future appreciation and gain in the new state generally fall under that state's rules when you sell there.

Risks to Keep in Mind

• Federal deadlines are unforgiving. You have 45 days to identify replacement property and 180 days to close. Texas adds no extensions. See the IRS rules for 1031 exchanges.
• Boot is still taxable. Cash you take out or debt you fail to replace can create recognized gain, even with no state tax in play.
• Deferral is not elimination. The federal tax comes due when you eventually sell without exchanging, unless your estate plan uses the step-up in basis. Ask your estate planning attorney.
• Out-of-state obligations follow you. A prior exchange out of a claw-back state can carry annual filing duties into your Texas ownership.

Texas 1031 Exchange FAQs

Does Texas tax 1031 exchanges?
No. Texas has no state income tax, so there is no state tax to defer and no state exchange filing.

Why bother with a 1031 exchange in Texas if there is no state tax?
Federal taxes. Capital gains, depreciation recapture, and the net investment income tax can take more than a quarter of a typical gain. An exchange may defer all of it.

Does Texas withhold anything when I sell?
No. Texas has no withholding at closing for resident or nonresident sellers.

I am selling property in another state and buying in Texas. What applies?
The selling state's rules control your closing, including any withholding and exemption forms. Once you own in Texas, Texas adds nothing. Watch for claw-back filings if you exchanged out of California, Oregon, Montana, or Massachusetts.

Do I still need a qualified intermediary in Texas?
Yes. The qualified intermediary requirement is federal. You cannot touch the sale proceeds and still qualify for deferral, no matter what state you are in.

Sources

• Internal Revenue Service, Like-Kind Exchanges, Real Estate Tax Tips
• Tax Foundation, State Individual Income Tax Rates and Brackets, 2026
• California FTB, Reporting Like-Kind Exchanges (cross-state claw-back reference)

Want to learn more? Our 1031 exchange guide covers the full process from sale to replacement. Ready to start a Texas exchange? WealthBuilder 1031 is attorney-owned right here in Texas, serves all 50 states, and charges a flat $1,000 fee. Start at WealthBuilder1031.com or call 888-508-1901.

This page does not constitute legal or tax advice. Consult your attorney and tax advisor about your specific situation.

Ready to start your Texas 1031 exchange? WealthBuilder 1031 acts as your qualified intermediary for a flat $1,000 fee, $750 at your sale and $250 at your purchase. See our Texas 1031 exchange services to get started.