What Is a 1031 Exchange and Can I Use It in Texas?

If you own investment real estate in Texas and are thinking about selling, a 1031 exchange may allow you to defer — not eliminate, but defer — the capital gains tax on your sale by rolling the proceeds into another qualifying property. Here is how it works.

What Is a 1031 Exchange?

A 1031 exchange — named for Section 1031 of the Internal Revenue Code — allows a real estate investor to sell an investment property and defer federal capital gains taxes by reinvesting the proceeds into a like-kind replacement property within specific timeframes. The exchange does not eliminate the tax; it defers it until the replacement property is eventually sold in a taxable transaction (unless another 1031 exchange is executed at that point). Because Texas has no state income tax, Texas investors conducting a 1031 exchange avoid the state-level capital gains taxes that make this strategy even more critical in states like California.

What Properties Qualify?

Both the relinquished property (what you sell) and the replacement property (what you buy) must be held for investment or productive use in a trade or business. Qualifying properties include residential rental properties, commercial properties, raw land, retail properties, and industrial properties. Primary residences do not qualify for a 1031 exchange — only investment or business-use properties. The replacement property does not need to be the same type as the relinquished property: you can sell a rental house in Boerne and exchange into a commercial property in San Antonio, for example, and the like-kind requirement is broadly satisfied as long as both are U.S. real property held for investment.

The Critical Timelines

• 45-day identification window: After closing on the sale of the relinquished property, the investor has 45 calendar days to identify potential replacement properties in writing to the qualified intermediary.
• 180-day exchange window: The investor must close on the replacement property within 180 calendar days of the sale of the relinquished property (or by the tax return due date for the year of the sale, whichever is earlier).
• Qualified Intermediary requirement: The exchange proceeds must be held by a qualified intermediary — not touched directly by the investor — from the time of sale through the purchase of the replacement property. Receiving the funds directly, even temporarily, disqualifies the exchange.

What Texas Investors Need to Know

Texas has no state income tax, which means Texas investors conducting a 1031 exchange are deferring only the federal capital gains tax (typically 15% to 20% for long-term gains, plus the 3.8% Net Investment Income Tax for higher-income investors). This is still a significant amount on a meaningful real estate gain. A 1031 exchange in Texas requires coordination with a qualified intermediary, a tax advisor, and a real estate agent who understands the timeline constraints. It is not a transaction that benefits from slow decision-making — the 45-day identification window is firm and unforgiving.

Rise Property Group | KW Boerne, Powered by PLACE | Licensed in Texas | therisepropertygroup.com