1031 exchange in
Texas.

Does Texas follow federal 1031 rules?

Texas has no state income tax, so there is no state-level 1031 conformity question — federal 1031 mechanics are the entire game. Texas is the #1 1031 destination in the country, anchored by no income tax, deep institutional CRE inventory across DFW, Houston, Austin, and San Antonio, and the largest sustained CA-to-TX migration of capital and population in modern history.

Texas capital gains tax structure

Texas has no state income tax and no state-level capital gains tax — federal returns only for individuals. The Texas Franchise (Margin) Tax applies to entities with annualized total revenue above the no-tax-due threshold ($2.65M for the 2026 report year), at rates of 0.75% on standard taxpayers and 0.375% on retailers/wholesalers.

Texas has no individual income tax and no corporate income tax in the traditional sense — the Texas Constitution prohibits an individual income tax without voter approval. Capital gains for individuals: federal only, zero state. The Texas Franchise Tax (commonly called the Margin Tax) applies to most entities doing business in Texas — partnerships, LLCs, corporations, and similar — with annualized total revenue above the no-tax-due threshold of $2,650,000 for the 2026 report year (up from $2,470,000 prior). Tax rate is 0.75% on the taxable margin for standard taxpayers and 0.375% for entities primarily engaged in retail or wholesale trade. Margin is calculated as the lower of: (a) 70% of total revenue; (b) revenue minus cost of goods sold; (c) revenue minus compensation (capped at $480,000 per person for 2026); or (d) revenue minus a flat $1M deduction. The EZ Computation rate of 0.331% is available for entities under certain thresholds. Property tax is the dominant tax burden in Texas — there is no state property tax, but local school district, county, city, and special district taxes commonly stack to 2.0-2.7% of assessed value annually.

Federal tax treatment of a successful 1031 is deferral of capital gain and unrecaptured Section 1250 depreciation recapture (federally taxed at a maximum 25% when eventually recognized). Texas's state treatment sits on top of those federal rates.

Common 1031 replacement strategies in Texas

DFW industrial absorption is the largest CRE story in the country — AllianceTexas, the DFW Inland Port (southern Dallas), and the broader I-35/I-45 corridor have absorbed hundreds of millions of SF over the past decade. Big-box logistics 5.0-5.75% on credit-tenant; small-bay industrial 6.0-6.75%. DFW multifamily Class A trades 5.0-5.75% in core submarkets, value-add B 6.0-6.75%. Houston is energy plus medical (Texas Medical Center is the largest medical complex in the world by employment) plus logistics — petrochemical along the Houston Ship Channel, distribution along I-10 and I-45. Multifamily Class A 5.25-6.0%, industrial 5.5-6.5%. Austin is the tech metro — Apple, Tesla, Meta, Oracle, Samsung, and the broader semiconductor and software cluster. Multifamily Class A traded sub-5% at peak (2021-2022), now widened to 5.25-6.0% post-supply correction. San Antonio is military (JBSA, Lackland, Randolph) plus medical plus a credible value-relative-to-Austin story (multifamily Class A 5.5-6.25%). The CA-to-TX 1031 migration has been the single largest cross-state 1031 flow in the country for the past six years — pricing in TX core submarkets reflects this premium.

Top Texas CRE markets for 1031 buyers

Dallas–Fort Worth

DFW is the #1 industrial market in the US by absorption — AllianceTexas (north Fort Worth, the largest master-planned industrial development in the country), DFW Inland Port (southern Dallas), and the broader I-35/I-45 corridor have absorbed hundreds of millions of SF over the past decade. Big-box credit-tenant industrial 5.0-5.75%, small-bay 6.0-6.75%. Multifamily Class A in Uptown, Frisco, Plano, and the urban core trades 5.0-5.75%; value-add Class B 6.0-6.75%. NNN retail along the major corridors 5.5-6.5% on national-credit. Office is bifurcated — Class A in Frisco/Legacy West holds 7-7.5%, downtown Dallas Class B in distress with sub-9% cap trades on stabilized assets. The CA-to-TX 1031 capital flow concentrates here.

Houston

Energy (oil and gas, petrochemical, midstream), medical (Texas Medical Center is the largest medical complex in the world by employment), and logistics (Port of Houston, distribution along I-10 and I-45) anchor demand. Class A multifamily 5.25-6.0%, value-add B 6.0-6.75%. Industrial along the Houston Ship Channel and the I-10 corridor trades 5.5-6.5% on credit-tenant. Houston has the deepest medical-office market in the country — TMC-adjacent product trades sub-6%. Hurricane and flood-zone risk underwriting is more material here than anywhere else in TX — Harvey (2017) and the 2024 derecho repriced flood-zone basis.

Austin

Tech-driven — Apple's North Austin campus, Tesla's Gigafactory in Travis County, Meta, Oracle, Samsung's Taylor semiconductor fab. Multifamily Class A traded sub-5% at the 2021-2022 peak, then widened to 5.25-6.0% post-supply correction. The 2022-2024 multifamily delivery pipeline was massive and digestion continues into 2026. Industrial along the SH 130 corridor trades 5.5-6.5%. Office in distress — Class B downtown Austin has repriced 30-50% from 2019 highs. The honest read on Austin: it remains a credible 1031 destination but the easy 2018-2022 entry economics are gone, and underwriting must respect both the supply digest and the moderating tech-employment story.

San Antonio

Military (Joint Base San Antonio — Lackland, Randolph, Fort Sam Houston) plus medical (UT Health, Methodist, Baptist) plus a credible value-relative-to-Austin growth story. Multifamily Class A 5.5-6.25%, value-add B 6.5-7.5%. NNN retail along Loop 1604 and US-281 trades 6.0-7.0%. Industrial along I-35 and I-10 6.0-7.0%. San Antonio is the affordable-Austin alternative for both residents and 1031 capital, with cap rates 50-75 bps wider than Austin core for similar product quality. The ETJ and annexation politics are unique to TX cities — pre-LOI any deal in the SA ETJ for jurisdictional clarity.

Local counsel, recording, and filing in Texas

Texas is a deed-of-trust state with non-judicial foreclosure as the standard — typically the fastest commercial foreclosure path in the country (under 60 days from notice to sale in many cases). Title insurance rates are state-regulated and uniform across companies (the Texas Department of Insurance promulgates rates), which removes shopping but locks in cost. Recording is at the county level (254 counties — the most of any state); Dallas, Tarrant, Harris, Travis, and Bexar counties carry most institutional volume. Texas is a community property state, which has material consequences for spousal ownership, basis at the first death (full step-up on community property under IRC § 1014(b)(6)), and divorce-related real estate transfers. Use TX counsel for any entity structuring conversation — Margin Tax exposure for SPEs is the most common structural error, and the property-tax-protest cycle is its own annual practice.

Recent developments in Texas

SB 2 (88th Legislature, 2nd Special Session, 2023) compressed school-district maintenance and operations tax rates and increased the homestead exemption — Proposition 13 (passed November 2025) raised the school district homestead exemption from $100,000 to $140,000 effective January 1, 2026, with the senior/disabled additional exemption rising to $60,000 (combined $200,000 for qualifying seniors). These changes affect homestead-eligible properties only, not commercial. Commercial property continues to bear the full appraisal burden, which is why the annual property tax protest cycle is core to any TX CRE business plan. The 2023 SB 2 package also implemented a 20% appraisal cap on non-homestead properties under $5M for three years — a meaningful but capped relief for small-CRE owners.

Common mistakes in Texas 1031 exchanges

• Modeling TX as zero-tax without pricing in the property tax burden. Texas has no income tax but among the highest property tax burdens of any state — 2.0-2.7% of assessed value annually is normal in major metros, and assessed values rise aggressively post-acquisition. A 6% headline cap rate on a TX deal can become a 4.5% effective cap rate after the first reassessment. Model property tax as the largest line in your operating expense pro forma and budget for the annual protest. Treat property tax growth as a 5-7% annual assumption unless you have specific reason otherwise.
• Forgetting the Texas Margin Tax on the holding SPE. Texas Franchise (Margin) Tax applies to most entities doing business in TX with annualized total revenue above the no-tax-due threshold ($2.65M for 2026 report year). For a single-asset SPE holding a $20M Class A multifamily property, gross revenue easily clears that threshold, and the entity owes Margin Tax at 0.75% of margin (with several alternative calculation methods). Out-of-state buyers consistently structure into single-asset LLCs without modeling the Margin Tax exposure. The tax is real money — get a TX CPA in the entity-structuring conversation pre-LOI.
• Treating community property mechanics like separate-property states. Texas is a community property state. For married 1031 investors, this means: (1) property acquired during marriage is generally community property regardless of which spouse holds title; (2) at the death of one spouse, the entire community property gets a full step-up in basis under IRC § 1014(b)(6), not just the decedent's half — a massive estate-planning advantage versus separate-property states; (3) divorce property division is governed by Texas Family Code, not the deed alone. Out-of-state attorneys structuring TX deals consistently miss this. The full step-up at first death is one of the most powerful planning advantages in the country.

What to do if you're starting a Texas-source 1031

1. Engage a Qualified Intermediary before the downleg closes. Your QI cannot be a disqualified person (attorney, CPA, or real estate agent who has represented you in the last two years).
2. Confirm state conformance and any clawback or withholding filings with a Texas-licensed CPA.
3. Identify replacement property within 45 days in writing, delivered to your QI, under the Three-Property Rule or one of the alternative identification rules.
4. Close on replacement within 180 days of the downleg closing or by your federal tax-return due date (with extensions), whichever is earlier.
5. File Form 8824 with your federal return reporting the exchange. File any required Texas state forms for the year, including any clawback or withholding-exemption filings.

FAQ: 1031 exchanges in Texas

Why is Texas the #1 1031 destination in the country?

Five reasons stack: (1) no state income tax means zero state drag on the federal deferral; (2) deep institutional CRE inventory across four major MSAs (DFW, Houston, Austin, San Antonio) gives 1031 buyers real product choice within identification windows; (3) the largest sustained CA-to-TX migration in modern history (population, jobs, capital) supports multi-decade growth assumptions; (4) deed-of-trust foreclosure regime is the most lender-friendly in the country; (5) DFW industrial absorption alone is the largest single-MSA CRE story in North America. The combination has made TX the dominant cross-state 1031 destination since roughly 2018.

How does the Texas Margin Tax affect my SPE structure?

If your holding entity (LLC, LP, corporation) does business in TX with annualized total revenue above $2.65M (2026 threshold), it owes Margin Tax at 0.75% of taxable margin — calculated as the lower of 70% of revenue, revenue minus COGS, revenue minus compensation (capped at $480K per person for 2026), or revenue minus $1M flat deduction. Single-asset SPEs holding $20M+ multifamily or industrial almost always clear the threshold. The tax is small in absolute dollars (typically $5K-$30K annually for a single-asset SPE) but easy to forget. Use a TX CPA to model it pre-acquisition.

Is the property tax burden really that bad in Texas?

Yes. TX has no state property tax, but local school district, county, city, MUD, and special district taxes commonly stack to 2.0-2.7% of assessed value annually in the major metros — the second-highest effective rate in the country after New Jersey for commercial property. Post-acquisition reassessment is aggressive. The annual protest cycle is its own practice — most institutional owners use a property tax consultant on contingency (20-50% of first-year savings). Model property tax growth at 5-7% annually unless you have a specific reason otherwise.

What changed with Texas property tax in 2026?

Proposition 13 (passed November 2025) raised the school-district homestead exemption from $100,000 to $140,000 effective January 1, 2026, with the senior/disabled additional exemption rising from $10,000 to $60,000 (combined $200,000 for qualifying seniors). These changes affect homestead-eligible primary residences only, not commercial CRE. The 2023 SB 2 package also implemented a 20% appraisal cap on non-homestead properties under $5M for three years — a small-CRE relief that may sunset depending on legislative action. Commercial CRE above $5M continues to bear full appraisal exposure, which is why the protest cycle stays core.

How does Texas community property law affect a 1031 exchange between spouses?

Two big things. First, real property acquired during marriage in TX is generally community property regardless of which spouse holds title — both spouses must sign the deed for a valid conveyance, and the QI agreement should reflect both. Second, at the first spouse's death, the entire community property gets a full step-up in basis under IRC § 1014(b)(6), not just the decedent's half. This is one of the most powerful planning advantages in the country: a married couple holding a $10M TX 1031-replacement property with $2M basis steps up to $10M basis at the first death, eliminating the entire deferred federal gain. Worth restructuring separate-property holdings into community property well before death where the facts support it.

Does Texas have non-resident withholding on real estate sales at closing?

No. Texas has no individual income tax and no non-resident withholding regime — closings have zero income-tax-side withholding. The only transactional friction is title insurance (state-promulgated rates) and recording fees. Compared to CA's 3.33% mandatory withholding, OR's 8% withholding, or RI's 6% withholding, TX is the cleanest closing in the country for non-residents.