The 1031 exchange in Texas: the rules, the timeline, and the tax you still owe.
You have equity in Texas land or property, and when you sell, the goal is to keep it working, moved into your next investment rather than paid out in tax. Texas has no income tax to worry about, and a few wrinkles that catch sellers who assume that is the whole story. The 1031 exchange in Texas runs on the federal exchange rules, the same 45 and 180 days as anywhere else. What gets missed is the Texas layer: no transfer tax at closing, which surprises people from other states, but a property-tax bill that resets to full value on whatever you buy, an agricultural rollback that can follow ranch and farmland when the use changes, a franchise tax on the entity that holds the property, and a body of law that treats mineral and royalty interests as real estate. This page covers the federal rules briefly and the Texas specifics in full.
General information, not advice for your sale. The tax side of a specific Texas exchange is what our real estate tax work covers, for owners anywhere in the state.
Under contract, or mid-exchange with the clock running? There may still be time. Start with the same call.
The clock is unforgiving, and the pressure to buy something before it runs out is real, on top of the Texas questions nobody warns you about until closing: the rollback on your ag land, the reappraisal on what you buy. One call tells you whether an exchange even fits your sale, and sometimes the honest answer is that it does not.
Does Texas tax the gain? No. Here is what it taxes instead.
Texas has no personal income tax. The Texas Constitution has barred one since 2019, and in November 2025 voters added a second bar aimed squarely at taxes on capital gains. So there is no Texas capital gains tax on real estate for individuals, trusts, or pass-through entities, and unlike Florida there is no transfer tax on the deed either. Texas collects its share differently: every year through property tax, and through a franchise tax on the entities that own property.
Capital gains, recapture, and the investment income tax
The federal capital gains tax on your appreciation, depreciation recapture on a rental at its own higher rate, and the net investment income tax above the income threshold all apply to a Texas sale exactly as they would anywhere. A completed 1031 exchange defers all three. A failed one owes all three in a single year.
No transfer tax on the deed
Texas is one of about a dozen states with no state or local real estate transfer tax. You pay a flat county recording fee per document, not a percentage of the price. For an exchange this is a quiet advantage: the sale side costs less in state charges than it would in most states, and there is no stamp tax to plan around as an exchange expense.
Property tax, appraised at market value
Texas leans on property tax harder than almost any state, and appraisal districts value property at market value as of January 1. Any limit on annual increases is tied to the owner: the homestead cap applies only to a homestead, and the temporary cap on non-homestead property takes effect only after your first full year of ownership and is scheduled to expire at the end of 2026 unless the Legislature extends it. Either way, the first bill on the property you buy is at full market value, often far above what the seller was paying under a capped appraisal. Budget the replacement on that number.
The franchise tax
Texas does not tax people’s income, but it does tax entities. The franchise tax applies to LLCs, corporations and most partnerships doing business in Texas, including those whose business is owning real estate. An LLC that holds rental property cannot use the passive-entity exemption: Texas does not count rent as passive income and does not let LLCs or corporations qualify at all. Whether the entity owes anything depends on its total revenue against the Comptroller’s no-tax-due threshold. Because Texas computes total revenue from the federal return, a gain deferred under Section 1031 generally does not show up as Texas revenue, while a taxable sale does, and can push a small entity over the threshold for that year.
The agricultural rollback
Land carried at agricultural or open-space valuation is taxed on what it produces, not what it is worth. When the use changes, Texas claws back the difference for the three preceding years, plus interest, and a lien attaches to the land the day the use changes. A sale by itself does not trigger it; a buyer who stops farming does. The rollback follows the land, so who pays it is a contract question to settle before closing. A sale for right-of-way or a condemnation is exempt by statute, which matters for the section on takings below.
The rules are federal. The wrinkles are Texas’s.
Section 1031 is federal law, and Texas adds no exchange statute, no state approval, and no state form. The 1031 exchange timeline in Texas is the national one: 45 calendar days from your closing to identify replacement property in writing, 180 calendar days from that same closing to acquire it, or your return due date if it comes first. A qualified intermediary holds the money throughout. Five things are different about doing it here.
Mineral and royalty interests count as real estate
Texas law treats the mineral estate as real property, and the federal exchange rules follow: a fee mineral interest, or a royalty interest that lasts as long as production continues, can be exchanged for other real property, and other real property can be exchanged into it. Production payments, carved-out interests that end once a set amount has been paid, do not qualify; federal law treats them as loans, not property. Working interests depend on how they are held. If your sale includes minerals, get the interest classified before you identify replacements.
The rollback exemption for takings
The agricultural rollback does not apply when the change of use results from a sale for right-of-way, a condemnation, or a transfer to the state for a public purpose. For Texas landowners facing a pipeline, a highway or a transmission line, that exemption pairs with Section 1033, covered below, to change the whole tax picture of a forced sale.
Community property and the basis at death
Texas is a community property state. Under the federal rules, when one spouse dies, both halves of community property take a new basis equal to fair market value, not just the decedent’s half. For a couple holding appreciated Texas property, that can erase decades of gain and recapture without any exchange, and Texas has no inheritance or estate tax; since November 2025 the Texas Constitution bars one. Sequence matters. An owner nearing that event may be better served holding than exchanging, and an exchange defers the gain into property that still receives the step-up later.
Hurricanes, floods and winter storms
The 45- and 180-day periods have no extensions on request, but they are among the deadlines the IRS may postpone after a federally declared disaster, under Revenue Procedure 2018-58. Texas taxpayers have received that relief after coastal hurricanes and, in 2021, statewide after the February winter storm. It applies only when the IRS issues a notice, only for the counties and taxpayers it names, and on its own terms. Check the notice for your county before assuming anything.
Nobody licenses the intermediary
A handful of states regulate qualified intermediaries; Texas is not one of them, so anyone can call themselves one. Your exchange funds sit with that company for up to six months. Ask how funds are held (segregated, in your name, at a bank you can verify), what bonding and errors-and-omissions coverage they carry, and how long they have operated. A Texas address is not a requirement; a clean answer to those questions is.
How does a 1031 exchange work in Texas, start to finish?
The sequence is the same as anywhere; the order matters more than most sellers realize, because the decisions that protect the exchange, the intermediary, the fallback, and in Texas the rollback and mineral questions, all have to be settled before the closing that starts the clock.
Your agent runs the sale and the search for replacements. Your title company handles the deed, the recording and the settlement statement. The intermediary holds the money. Your CPA reports the exchange on Form 8824 next spring. The question none of them owns is whether the exchange protects your equity, what the tax looks like if it fails, and what the fallback is when your first choices fall through. That is the layer we add, coordinated with the people you already have. We do not list your property, hold your exchange funds, or give legal advice.
And sometimes the honest answer is that a 1031 is not the right move for your sale. When the gain is small, when a step-up in basis is closer than you think, or when you want out of real estate, paying the tax with a plan can beat an exchange you did not want. We will say so on the first call.
Texas takes more land than almost any state. Which clock are you on?
Pipelines, highways and transmission lines make Texas one of the most active condemnation states in the country. So a Texas owner selling land or property may be selling by choice, or may be selling because a government or a utility is forcing it. The tax answer forks, and most owners do not know which side they are on.
A 1031 is for the sale you chose. If a pipeline, a highway, or a transmission line is forcing the sale, you are not on the 1031 clock at all. You are on the 1033 clock, and it works in your favor: a replacement window measured in years rather than days, proceeds you may hold yourself, no intermediary, and in Texas an exemption from the agricultural rollback for a sale for right-of-way or a condemnation. Owners who do not know this sometimes rush a forced sale into a 45-day exchange they never needed.
Eminent domain tax planning is our core practice. The 1033 Exchange page covers the replacement rules, the election and the timeline in full, and Eminent Domain explains how we work with owners and their attorneys before the settlement is signed. If any part of your Texas sale is compelled, read that side before you sign an exchange agreement.
Section 1031
- 45 days to identify, 180 days to close, counted from your closing.
- A qualified intermediary must hold the proceeds.
- Replacement: any real property held for investment or business use.
- A buyer who changes the use of ag land can trigger the rollback.
Section 1033
- Generally two years after the close of the tax year in which the gain is realized; three for condemned real property held for business or investment.
- You may hold the proceeds yourself. No intermediary.
- Replacement: property similar or related in service or use, or like-kind real property for condemned business or investment real estate.
- A sale for right-of-way or a condemnation is exempt from the agricultural rollback.
Texas resident, out-of-state property. Or the reverse.
Texas’s lack of an income tax follows the taxpayer, not the property. That produces two common situations with opposite answers.
You live in Texas and are selling property in another state
The state where the property sits can tax the gain as a nonresident, and several states require the closing agent to withhold state tax from a nonresident seller’s proceeds at closing. Some states also do not follow the federal exchange deferral for their own tax, or require you to keep filing with them to track the deferred gain after you exchange into Texas property. Your Texas residency does not switch any of that off. Where the property is drives the answer.
You live in another state and are selling Texas property
Texas will not tax the gain, and there is no Texas withholding on out-of-state sellers. Your home state usually will tax it, as it taxes your income from everywhere, so the exchange’s value to you is measured against your own state’s rate plus the federal layers. If the property was community property acquired while you lived in Texas, its character can follow it after a move and change the basis picture at death; raise that with your advisors. If you are a foreign owner, FIRPTA withholding is the item to solve before the contract is signed.
Texas 1031 questions, answered.
Every situation is different; confirm specifics with your attorney, your CPA, and your intermediary.
No. Texas has no personal income tax, and the Texas Constitution has barred one since 2019. In November 2025 voters added a second bar aimed squarely at taxes on the realized or unrealized capital gains of individuals, families, estates and trusts. So an individual, a trust, or an LLC taxed as a partnership or disregarded entity pays no Texas tax on the gain from selling real estate. The federal layers still apply in full: capital gains tax, depreciation recapture and, above the income threshold, the net investment income tax. Texas collects differently: through property tax every year, and through the franchise tax on entities that own property.
The exchange itself is federal law. Section 1031 is part of the Internal Revenue Code, and Texas adds no state exchange statute, no state approval, and no state form. What is different is the layer around it: Texas has no transfer tax on the deed, so the sale side costs less in state charges than in most states; the property you buy is appraised at full market value, so its property-tax bill can jump; land carried at agricultural valuation can trigger a rollback tax when the use changes; an entity that owns the property is subject to the franchise tax; and Texas law treats mineral and royalty interests as real property, so they can be part of an exchange.
The same as everywhere in the country: 45 calendar days from the closing of your sale to identify replacement property in writing, and 180 calendar days from that same closing to acquire it, or your tax return due date if that comes first. Weekends and holidays count. The only extensions are IRS disaster postponements, which Texas taxpayers have received after coastal hurricanes and, in 2021, statewide after the February winter storm, when the IRS issued relief notices that covered the 1031 deadlines.
No. Texas is one of about a dozen states with no state or local real estate transfer tax. You pay a flat county recording fee per document, not a percentage of the price. That is a genuine difference from states like Florida, where a documentary stamp tax is due at closing whether or not you exchange. It does not change the federal side: the exchange rules and the federal taxes are the same.
Very likely, yes. Texas appraisal districts value property at market value as of January 1, and any limit on annual increases is tied to the owner, not the property. The homestead cap applies only to a homestead. The temporary cap on non-homestead property takes effect only after your first full year of ownership and is scheduled to expire at the end of 2026 unless the Legislature extends it. Either way, your first bill on the property you buy is at full market value, which can be far above what the seller was paying under a capped appraisal. Budget the replacement on that number, not the listing’s tax history.
Land appraised for agricultural or open-space use is taxed on its productive value rather than its market value. When the use of that land changes, Texas imposes an additional tax equal to the difference for the three years before the change, plus interest, and a lien attaches to the land the day the use changes. A sale by itself does not trigger it; a new owner who stops the agricultural use does. Because the tax follows the land, who pays it is a contract question to settle before closing. The rollback does not apply when the change of use results from a sale for right-of-way, a condemnation, or a transfer to the state for a public purpose.
Often, yes. Texas law treats the mineral estate as real property, and the federal rules follow: a fee mineral interest, or a royalty interest that lasts as long as production continues, is real property that can be exchanged for other real property, and other real property can be exchanged into it. Production payments, which end once a set amount has been paid, do not qualify; federal law treats them as loans, not property. Working interests depend on how they are held. If your sale includes minerals, have the interest classified before you identify replacements.
An LLC or corporation that owns Texas real estate is a taxable entity for the franchise tax, and it cannot use the passive-entity exemption: Texas does not count rent as passive income and does not let LLCs or corporations qualify at all. Whether it owes anything in a given year depends on its total revenue against the Comptroller’s no-tax-due threshold. Texas computes total revenue from the federal return, so a gain deferred under Section 1031 generally does not appear as Texas revenue in the year of sale, while the gain on a taxable sale does and can push a small entity over the threshold for that year. Confirm the treatment with your CPA before you choose between an exchange and a sale.
Then you are probably not on the 1031 clock at all. A sale forced by condemnation, or made under threat of it, falls under Section 1033, which gives you generally two years after the close of the tax year in which the gain is realized, and three years for condemned real property held for business or investment, to replace the property, with no intermediary and no requirement to hand over the proceeds. Texas also exempts a sale for right-of-way or a condemnation from the agricultural rollback. Eminent domain tax planning is our core practice, and the 1033 Exchange page covers the rules in full.
- 26 U.S.C. §1031, Treas. Reg. §1.1031(k)-1 and Treas. Reg. §1.1031(a)-3 (what counts as real property, including natural deposits and interests in land): the federal exchange rules that govern in Texas. Rev. Rul. 68-331, 1968-1 C.B. 352, on exchanging oil and gas interests for other real property.
- 26 U.S.C. §1033: involuntary conversions, including condemnation and sales under threat of it; and 26 U.S.C. §1014(b)(6): basis of community property at a spouse’s death.
- Texas Constitution, Article VIII: §24-a (no individual income tax, 2019) and §24-b (no tax on the capital gains of individuals, families, estates or trusts, approved November 2025); Proposition 2 (2025).
- Texas Comptroller: Valuing Property: market-value appraisal as of January 1, the homestead cap, and the circuit-breaker limitation on non-homestead property with its 2026 expiration.
- Texas Comptroller: Agricultural and Open-Space Appraisal and Texas Tax Code §23.55: the change-of-use rollback (three preceding years, lien on the land, exemptions for right-of-way sales and condemnations).
- Texas Comptroller: Franchise Tax: Passive Entities: rent is not passive income; LLCs and corporations cannot be passive entities; and Franchise Tax overview for the current no-tax-due threshold.
- National Association of REALTORS: Real Estate Transfer Tax: Texas among the states with no statewide transfer tax.
- IRS: FIRPTA withholding (26 U.S.C. §1445); IRS: Tax relief in disaster situations and Rev. Proc. 2018-58, which lists the 1031 deadlines among those the IRS may postpone.
This page is general information about Section 1031 exchanges involving Texas real estate, current as of September 2026. It is not tax, legal, or investment advice, and it does not describe or offer any investment. Texas property-tax and franchise-tax rules change; confirm current thresholds and caps with the Comptroller and your advisors. Your outcome depends on facts specific to your property and your return.
Your equity kept moving, on your terms.
The sale closes, the federal tax is planned for instead of stumbled into, the rollback and the reappraisal are handled, and your equity moves into the next investment rather than into a tax bill. Where the money goes after the closing, you decide, not the deadline.