1031 Exchanges in Texas

State tax on the gain

Texas has no state income tax, so there is no state capital gains tax on your sale — full stop. Your entire tax exposure is federal: capital gains at 0/15/20%, depreciation recapture at up to 25%, and possibly the 3.8% net investment income tax.

Does Texas recognize 1031 deferral?

There is nothing to conform — with no income tax, Texas has no position on your deferral. A 1031 exchange of Texas property is governed entirely by the federal rules: the deadlines, the intermediary, and the equal-or-greater tests all apply exactly as written.

Withholding at closing

None. Texas has no state income tax withholding on real estate sales. Your closing proceeds route to your qualified intermediary without any state-level holdback.

Exchanging into another state

Exchanging out of Texas is clean — there is no deferred Texas tax to track. The direction to watch is the reverse: exchange into Texas from a state like California, and the origin state's claim on the deferred gain follows the exchange. Texas won't tax the eventual sale, but California's Form 3840 clawback will still be waiting. Investors relocating gains from high-tax states into Texas should understand exactly which state's claim rides along.

State tax rules change and have exceptions this page can't cover. Confirm current rates and filing requirements with a tax professional licensed in Texas.