Federal tax
1031 exchanges for Texas property
A like-kind exchange under Section 1031 of the Internal Revenue Code lets an owner sell investment real estate and buy replacement property without paying federal tax on the gain at the time of sale. The rules are strict, and the deadlines do not move. Because Texas does not tax individuals' income or capital gains, the stakes in a Texas exchange are almost entirely federal.
Not tax advice. Exchanges fail on details. Work with a CPA and a qualified intermediary before you list the property, not after it sells.
The core rules
- Real property only. For exchanges after 2017, only real property held for use in a trade or business or for investment qualifies. Your home and property held mainly for resale, such as flips, do not.
- Like-kind is broad for real estate. A rental house can be exchanged for land, a commercial building or a different rental, as long as both are held for investment or business use. Real property in the United States and real property abroad are not like-kind.
- You must not receive the sale proceeds. A qualified intermediary holds the money between sale and purchase. If the funds reach you, or you have the right to them, the exchange is generally lost.
- Buy equal or greater value and reinvest all the cash to defer all the gain. Cash you keep, or debt reduction you don't replace with new debt or added cash, is "boot" and is taxable.
- The same taxpayer generally must sell the old property and buy the new one.
The two deadlines
| Deadline | Counting from the sale of the old property | What must happen |
|---|---|---|
| Identification | 45 calendar days | Identify replacement property in a signed writing delivered to the intermediary or another permitted party |
| Completion | 180 calendar days, or the due date of your tax return for the year of the sale if earlier (unless you extend the return) | Close on the replacement property |
Weekends and holidays do not extend these periods. They run at the same time, so the 45 days are part of the 180. A sale late in the year is where the tax return due date can cut the 180 days short, so an owner in that position may need to extend the return.
Identification rules
Treasury regulations allow you to identify replacement property under one of these rules:
| Rule | What you may identify |
|---|---|
| Three-property rule | Up to three properties of any value |
| 200% rule | Any number of properties whose total value is no more than 200% of the value of the property sold |
| 95% rule | Any number of properties of any value, if you acquire at least 95% of the total value identified |
The description must be unambiguous, such as a street address or legal description. Property you acquire within the 45 days counts as identified.
Step by step
- Engage a qualified intermediary and sign the exchange agreement before closing the sale. The intermediary cannot be your agent or someone disqualified under the regulations, such as a recent attorney, accountant or real estate agent of yours.
- Assign the sale contract to the intermediary and close the sale; the proceeds go to the intermediary.
- Identify replacement property in writing within 45 days.
- Assign the purchase contract to the intermediary and close on the replacement within 180 days, using the funds the intermediary holds.
- Report the exchange on your federal return using Form 8824.
Things that trip owners up
- Holding period and intent. The Code sets no fixed holding period, but property bought to flip, or converted to personal use soon after the exchange, invites challenge.
- Related parties. If you exchange with a related person, both generally must hold the exchanged properties for two years, or the deferral can be lost.
- Title must match. A single-member LLC disregarded for tax purposes is usually treated as its owner, but changing entities or adding partners mid-exchange can break it.
- Vacation homes. A second home qualifies only if held for investment. IRS Revenue Procedure 2008-16 gives a safe harbor based on rental and personal-use days.
- Deferral is not forgiveness. The deferred gain, including depreciation recapture, carries into the replacement property's basis.
- Reverse and improvement exchanges (buying first, or building on the replacement) are possible but more complex. IRS Revenue Procedure 2000-37 describes a safe harbor using an exchange accommodation titleholder.
- Partial exchanges. You can exchange and take some cash, but the cash is taxable.
What Texas adds
- No state income tax to defer. The Texas Constitution prohibits a tax on individuals' net incomes (Article VIII, §24-a) and, since a 2025 amendment, on individuals' capital gains (§24-b), so the benefit is federal.
- Franchise tax. If you hold property through an LLC or partnership, the entity is still subject to the Texas franchise tax rules on its revenue. See taxes on rental income.
- Out-of-state replacement property. If the replacement property is in another state, that state's tax rules may apply when you eventually sell. Some states track deferred gain from exchanges.
- Property tax resets. The replacement property is appraised at market value, and the circuit breaker limit, in the years it is in force, starts over under the new ownership. See Texas property taxes.
- Closing mechanics. Texas residential closings commonly run through a title company acting as escrow agent; make sure it knows about the exchange from the start. See title insurance and closing.
Common questions
How long do I have to hold a property before a 1031 exchange?
Section 1031 sets no fixed period. What matters is that you held the property for investment or business use. Related-party exchanges have a two-year rule, and the vacation home safe harbor uses a 24-month test.
Can I do a 1031 exchange on a house I lived in?
A principal residence does not qualify. A former home converted to a rental can, once it is held for investment, and a separate exclusion for home sales may apply in some combined situations. Ask a CPA.
Can I exchange into a property in another state?
Yes. Real property anywhere in the United States is like-kind to other U.S. real property.
What happens if I miss the 45-day deadline?
The exchange generally fails, and the sale is taxed as an ordinary sale. The deadlines are not extended for weekends or holidays, though federally declared disasters can bring IRS postponements.
Related guides
- LLCs for rental property — read before planning an exchange if an entity owns the property.
- Taxes on rental income in Texas
- Title insurance in Texas and the closing timeline
Official source: IRS Form 8824 and instructions.
Last reviewed 2026-09-17