What Are the Rules for 1031 Exchange in Texas?

A 1031 exchange is a powerful tax-deferral tool for real estate investors. Named after Section 1031 of the Internal Revenue Code, this mechanism allows property owners to defer capital gains taxes when selling investment properties, provided they reinvest the proceeds into similar property within a specific timeframe.

Understanding the rules for 1031 exchange, particularly in Texas, can help investors manage tax liabilities and expand their portfolios strategically. Texas offers diverse real estate investment options, making it a strong state for 1031 exchanges.

Schedule a consultation with Avidian Wealth Solutions today to see if a 1031 exchange aligns with your goals.

What is a 1031 exchange in Texas?

A 1031 exchange allows property owners to defer federal capital gains taxes by reinvesting proceeds from the sale of an investment property into a similar “like-kind” property. While Texas does not have a state income tax, this strategy remains valuable for investors seeking to minimize federal tax liability while growing their real estate portfolio.

The diverse Texas real estate market makes 1031 exchanges particularly attractive, offering opportunities across real estate sectors including:

• Residential properties
• Commercial buildings
• Agricultural land
• Industrial facilities

This diversity enables investors to strategically exchange properties while capitalizing on growth trends in different markets — from rapidly appreciating urban areas like Austin and Dallas, to ranch properties or land in more affordable rural regions.

What qualifies as a 1031 exchange?

In Texas, qualifying properties range from single-family rentals and commercial buildings to raw land. Furthermore, properties involved must:

• Be held for investment or business purposes
• Meet “like-kind” standards (similar nature or character)

Timing also plays a role: investors have 45 days from the sale to identify replacement properties and 180 days to complete the purchase. These timelines are strict, and missing either can disqualify the exchange, resulting in a taxable transaction.

What disqualifies a property from being used in a 1031 exchange?

Certain types of properties do not qualify for 1031 exchanges, mainly those held for personal use such as:

• Primary residences
• Vacation homes not used for rental income
• Properties bought for immediate resale (aka “flips”)

Additionally, investments in stocks, bonds, or partnership interests cannot be exchanged under 1031 guidelines, as these are not considered “like-kind” assets. Understanding what disqualifies a property can prevent costly mistakes and keep the exchange process compliant.

How many properties can you buy in a 1031 exchange?

Under the following rules, the IRS allows investors flexibility regarding the number of replacement properties acquired in a 1031 exchange:

• Three-property rule: Under the “three-property rule,” investors can identify up to three properties as potential replacements, regardless of their value.
• 200% rule: Alternatively, the “200% rule” allows the identification of an unlimited number of properties, provided their combined fair market value doesn’t exceed 200% of the relinquished property’s value.

You should also be aware of the 90% rule and the 2-year rule when making 1031 exchanges in Texas. 

What is the 90% rule for 1031 exchange?

The 90% rule is an alternative identification rule used when investors choose to identify more than three potential replacement properties. Under this rule, investors can identify any number of properties but must ultimately purchase properties that are at least 90% of the fair market value of the identified properties.

This rule aims to prevent “over-identification” without committing to substantial reinvestment, allowing flexibility while maintaining the intent of like-kind exchanges.

What is the 2-year rule for 1031 exchanges?

The 2-year rule applies to related-party exchanges, stipulating that both properties involved must be held for at least two years after the exchange. This rule prevents investors from swapping properties with family members solely for tax benefits.

For instance, if a taxpayer exchanges property with a close relative and sells it within two years, the transaction may be deemed a taxable event, nullifying the 1031 deferral. The two-year rule underscores the IRS’s intent for 1031 exchanges to be used for legitimate investment purposes.

Can you do a 1031 exchange with a family member? 

Yes, a 1031 exchange can be completed with a family member, but strict conditions apply. The related-party rules, particularly the 2-year holding period, prevent potential tax abuse. Both parties must hold the exchanged properties for two years post-transaction, ensuring the exchange serves investment rather than tax-avoidance purposes.

Engaging in a 1031 exchange with a family member can be advantageous, but IRS guidelines must be followed to retain its tax-deferral benefits.

Learn more about how to keep property in the family forever

What are the disadvantages of a 1031 exchange?

While 1031 exchanges offer substantial tax advantages, they are not without drawbacks.

• High tax burden: One major disadvantage is the potential for a higher tax burden if the investor eventually sells the replacement property without another exchange. By deferring taxes rather than eliminating them, a 1031 exchange may result in a large taxable gain when finally realized.
• Fees: Additionally, 1031 exchanges require significant administrative coordination and fees, as a qualified intermediary is mandatory. Investors also face the risk of cash flow limitations, as proceeds from the initial sale must be reinvested promptly, limiting liquidity.
• Strict deadlines: Lastly, strict identification and purchase deadlines can lead to rushed decision-making, potentially resulting in less favorable property investments.

Alternatively, one unique advantage of the 1031 exchange for high-net-worth investors is the potential for generational wealth transfer. Under current U.S. tax law, if an investor holds a property acquired through a 1031 exchange until death, the property’s tax basis “steps up” to its market value for heirs, effectively eliminating the deferred capital gains tax. This can be a powerful way to build and transfer wealth across generations, minimizing tax liabilities and preserving assets for future family members.

Let Avidian assist you in your investment and tax planning needs

Understanding the rules for 1031 exchange requires meticulous planning, timely action, and a clear understanding of IRS regulations. Whether you’re aiming to defer taxes, grow your real estate portfolio, or strategically align your assets, a 1031 exchange can be a powerful tool — but only if managed correctly.

The rules around property types, timelines, and qualifying criteria are strict, making it essential to approach each step with care to avoid unexpected tax implications or disqualification.

At Avidian Wealth Solutions, we’re here to help you choose to make more informed decisions regarding tax strategies that support your unique financial objectives. Our team can work with you to design a tailored approach, helping you structure a 1031 exchange that fits seamlessly into your broader financial picture. 

Reach out to schedule a consultation with Avidian and discover how a 1031 exchange in Texas can help you plan to preserve your gains and continue building your wealth.

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• Should You Update Your Estate Plan Before 2026?
• Retirement Planning for a Non-Traditional Career
• What to Know about the New 401(k) Catch-up Contribution Rules
• SALT Tax Deduction Changes and High-Income Earners
• What Is the Opportunity Zone 180-Day Rule?

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