1031 Exchanges in Texas: Rules, Taxes, Insurance, and the Long Arc

A Shop 1031 research page. Reviewed 2026-06-03. Every claim sourced; sources collected at the foot of the page.

Texas is a no-income-tax state, not a no-tax state. The distinction matters because most of the popular framing around Texas 1031 exchanges starts at “no state capital gains” and ends there, which is accurate as far as it goes and incomplete as a basis for underwriting. Texas has no personal or corporate income tax, which removes the state-level deferral question entirely. It also has the seventh-highest effective property tax rate in the country, a franchise tax that catches most LLCs even when the LLC owns only real estate, a coastal windstorm insurance association running a multi-hundred-million-dollar deficit after Hurricane Beryl, and reappraisal mechanics that look nothing like California’s Proposition 13 base. Each of these is independently sourceable. Together they form the actual calculus a Texas exchanger should run.

This page is the working guide. The federal §1031 floor, the absence of a state-level claim on the gain, the franchise-tax structure that turns entity choice into a tax-planning decision, the property-tax overlay that is the highest in the top ten, the post-Beryl insurance picture, the demographic story from the 2025 Census release, and the unique considerations a Texas exchanger should clear before identifying replacement.

§1. 1031 mechanics in Texas

The federal floor applies in Texas the same way it applies in every other state. Internal Revenue Code §1031 permits the deferral of gain on the sale of real property held for productive use in a trade, business, or investment, provided the proceeds are reinvested into like-kind real property of equal or greater value through a Qualified Intermediary. Identification of replacement must occur within forty-five days of the relinquished closing; the replacement must close within one hundred eighty days of the same event. The authorities are 26 U.S.C. §1031 and the implementing regulations at 26 C.F.R. §1.1031(k)-1, with operating guidance in IRS Publication 544 and the community-property treatment in IRS Publication 555. ^{1 2 3}

Texas imposes no personal income tax and no corporate income tax, which means there is no state-level deferral conformity question. The state simply has no claim on the gain. A Texas resident exchanging Texas real property for Texas replacement does the federal §1031 work and is finished with the state. The dominant cross-state inflow patterns (California, New York, Illinois, New Jersey exchangers buying Texas replacement) carry no Texas tax consequence at acquisition. The deferred gain on the originating state’s books rolls under whatever rule that originating state applies; Texas does not interact with it. The Texas Comptroller of Public Accounts is the state’s tax administrator, and the absence of an income tax is published policy. ⁴

The relevant Texas-level tax is the franchise tax, codified in Texas Tax Code Chapter 171, which applies to most entities chartered or doing business in the state. The franchise tax is computed on margin (a defined alternative to net income), not on income, and it catches LLCs and corporations even when the entity holds only investment real estate. There is an exemption: the passive entity exemption under Texas Tax Code §171.0003 applies to general or limited partnerships and certain non-business trusts whose income is at least ninety percent qualifying passive income (dividends, interest, capital gains, and certain royalties, with net capital gain on the sale of real property qualifying). The exemption does not apply to LLCs or corporations, even where the same income profile would qualify a partnership. The implication for the institutional 1031 exchanger acquiring Texas property is that entity choice (LP vs. LLC) becomes a tax-planning decision the exchanger should run with Texas-licensed counsel before forming the acquisition entity. ^{5 6}

Texas imposes no state-level registration or bonding regime on Qualified Intermediaries. The federal §1031 rules apply (unrelated to the taxpayer, qualified escrow, no disqualifying actions). The buyer should confirm the QI carries fidelity bonding and errors-and-omissions coverage proportionate to the transaction size; no Texas regulatory floor exists.

Closings in Texas are handled by independent title companies and escrow officers. Texas is a title-and-escrow state in operational form, though Texas-licensed attorneys are commonly engaged for transactions above the mid seven figures, for any cross-state structure, and for transactions involving mineral or surface rights severance (a Texas-specific consideration addressed in §5). The Texas Real Estate Commission (TREC) publishes standard exchange addenda for §1031 transactions. ⁷

There is no Texas state-level real-estate transfer tax. Counties charge nominal recording fees. The absence of a transfer tax is one of the structural reasons cross-state capital flows into Texas: a disposition in California (where Los Angeles Measure ULA can layer four to five-and-a-half percent on top of the documentary transfer tax) and an acquisition in Texas (where no transfer tax applies) produces a one-time closing-cost differential of several percent of basis on a large transaction.

§2. Property tax in Texas

Texas has the seventh-highest effective property tax rate in the country at approximately 1.40 percent of assessed value as of the most recent Tax Foundation data, with the 2025 vintage showing 1.47 percent on owner-occupied housing. The actual range is wide. Some Texas counties run effective rates above 2 percent once school district, municipal utility district, and bond-supported overlays are layered onto the county base. This is the inverse of the California picture: Texas has no income tax and a high property tax; California has a high income tax and a low property tax. The Texas tradeoff is published policy, not an accident of incentive. ^{8 9}

The structural mechanics are governed by the Texas Tax Code, principally Chapter 23 (appraisal methods and procedures) and Chapter 25 (local appraisal). Texas property is reappraised annually to fair market value as of January 1 by the county appraisal district. There is no Proposition 13 analog. There is no purchase-price anchor. There is no 2 percent annual cap on the assessment base. For investment property specifically, the assessed value tracks market value, and the assessed value can rise or fall meaningfully year over year as the local market moves. This is the practical reading: the exchanger’s hold-period property-tax line is not a fixed escalator. It is a variable tied to the appraisal district’s annual valuation, with administrative protest available under Texas Tax Code Chapter 41. ¹⁰

A homestead exemption applies to owner-occupied residential property only. Constitutional amendments approved by Texas voters in November 2025, retroactive to January 1, 2025, increased the school-district homestead exemption to $140,000 with additional carve-outs for over-sixty-five and disabled homeowners. A 10 percent annual appraisal cap applies to the homesteaded base (Texas Tax Code §23.23). None of these protections extend to investment property. An exchanger acquiring Texas residential, multifamily, industrial, retail, or office property is on the unprotected side of the appraisal regime and should underwrite the property-tax line from the acquisition price escalating to annual market reappraisal. ¹¹

The administrative remedy is the appraisal protest. Texas Tax Code Chapter 41 provides for an annual protest of the appraisal district’s valuation before the appraisal review board, with judicial appeal available under Chapter 42. The protest is an active part of operating-expense management for Texas commercial property owners, and budgets typically allocate a small percentage of the property-tax line for protest representation or counsel.

Harlow’s note on unit economics. On a $5,000,000 Texas commercial acquisition at the state-average effective rate, year-one property tax runs roughly $70,000. There is no Prop-13-style escalator cap. Build the hold-period line as the acquisition basis applied to the appraisal district’s annual valuation, with reappraisal in line with market movement and a modeled appraisal-protest recovery of 8 to 15 percent on the protested base in a typical year. Texas property-tax operating expense is meaningfully higher than California’s even before the bonds, and it is the single line item most often understated in cross-state replacement underwriting.

§3. Property insurance in Texas

Texas property insurance has a distinct structural feature: the Texas Windstorm Insurance Association (TWIA), the state’s insurer of last resort for windstorm and hail coverage on property in the fourteen coastal counties and parts of Harris County. TWIA was established under Texas Insurance Code Chapter 2210 and is administered by the Texas Department of Insurance. The 2024 Hurricane Beryl losses pushed TWIA into a $413.5 million deficit entering 2025, reversing a $45.9 million surplus reported one year earlier. ^{12 13}

The TWIA rate-setting dynamic is consequential for any coastal Texas replacement. TWIA’s 2024 actuarial analysis concluded that residential rates were inadequate by 38 percent and commercial rates by 45 percent. The TWIA Board voted in August 2024 to file for a 10 percent rate increase on residential and commercial policies. The Texas Department of Insurance rejected the increase in October 2024, finding it unjust and unfair to coastal property owners while acknowledging the underlying inadequacy. The 2025 actuarial analysis updated the required rate movement to 3 percent residential and 5 percent commercial for actuarial adequacy. The structural tension is unresolved: rates are below actuarial adequacy, the deficit is real, and the political process for rate increases is constrained. An exchanger acquiring coastal Texas commercial property should expect TWIA pricing to move materially in the medium term, and should size the operating-expense line above current TWIA rates. ¹⁴

Inland Texas property is covered by the standard private market and faces a different risk profile: hail and severe-thunderstorm convective losses, tornado exposure across the Plains corridor (Lubbock, Amarillo, north-central Texas), and an increasing wildfire signature in the Hill Country. The private market is more functional inland than on the coast, but the rate environment has tightened since 2022 as reinsurance capacity has repriced and the hail-loss ratio has deteriorated. Commercial property quotes in the major inland metros (Dallas-Fort Worth, Houston, Austin, San Antonio) should be obtained before exchange identification, not after, and should account for the deductible structure that has shifted toward percentage-of-insured-value on wind and hail.

Harlow’s note on unit economics. For a $5,000,000 Texas inland commercial property underwritten today, expect property-insurance expense in the range of 0.5 to 1.0 percent of insured value, or roughly $25,000 to $50,000 annually. For coastal property within TWIA territory, the range can run materially higher (0.8 to 1.8 percent of insured value, plus a separate flood policy where applicable), and the underwriting risk is rate movement, not just current pricing. Bind from a quote, not a national-average assumption, and confirm TWIA eligibility before identification on any property within the windstorm tier.

§4. Demographic trends

Texas added 391,243 residents in 2025 per the U.S. Census Bureau’s January 2026 release, reaching a total population of approximately 31.7 million. Texas led all states in absolute population growth, though the growth rate of 1.2 percent was the slowest annual rate since 2021. The underlying composition shifted meaningfully. International migration to Texas declined 48 percent year over year, falling from 319,569 in 2024 to 167,475 in 2025, with the reduction concentrated in the second half of the year as federal humanitarian programs were curtailed. Net domestic migration into Texas was 67,299 in 2025, well below the 2022 peak of approximately 222,000 and behind North Carolina (84,064) for the first time in over a decade. Natural increase remains the largest component, though it too is moderating with the national trend. ^{15 16}

The metropolitan distribution is concentrated. The ten Texas counties that added the most residents in 2025 are all located in the Houston, Dallas-Fort Worth, Austin, and San Antonio metropolitan areas. Harris County (Houston) added more than 48,000 residents in a single year, the largest absolute gain of any county in the United States. Dallas County, in a notable inversion, lost 2,616 residents, the largest absolute loss in Texas, while the surrounding Dallas-Fort Worth suburban counties continued to gain. The pattern is consistent with the national urban-to-suburban migration trend and is visible in property-tax base growth concentrating in the suburbs. ¹⁷

Median household income in Texas was approximately $79,000 in 2024 per Federal Reserve-published Census American Community Survey estimates. The Bureau of Economic Analysis reports Texas personal income growth among the highest in the South, with significant geographic concentration in the Austin and Houston metropolitan statistical areas. The income distribution is wider in Texas than the national average, reflecting both the high-income concentration in technology and energy sectors and the lower-income concentration along the Rio Grande Valley and in rural East Texas. ^{18 19}

The major Texas metropolitan markets relevant to 1031 exchangers are Houston-The Woodlands-Sugar Land (approximately 7.5 million population), Dallas-Fort Worth-Arlington (approximately 8.1 million), San Antonio-New Braunfels (approximately 2.7 million), and Austin-Round Rock-Georgetown (approximately 2.5 million). Each carries a distinct asset-class profile. Houston is the deepest industrial and multifamily market and the largest absorption corridor for distribution real estate; DFW carries the broadest cap-rate range across all asset classes and the deepest institutional buyer pool; Austin runs the tightest cap rates in the state and has absorbed the most California exchange capital per capita; San Antonio is the value play across multifamily and industrial. The Rio Grande Valley and West Texas offer the highest cap rates with the longest fundamentals risk.

§5. Unique legal and financial considerations

Several Texas-specific considerations sit outside the headline tax structure and the insurance picture, and each is worth surfacing before an exchanger identifies Texas replacement.

The first is the entity-choice question. As discussed in §1, the Texas franchise tax catches LLCs and corporations even on pure investment real estate, while the passive entity exemption is available to limited partnerships and certain non-business trusts. The institutional 1031 practice in Texas is to acquire investment real estate through a limited partnership structure where the passive-entity test can be cleared, rather than through the LLC structure that dominates 1031 acquisition in most other states. This is a Texas-specific entity choice and should be run with Texas-licensed tax counsel before forming the acquisition entity. The federal §1031 treatment is identical across entity choice; the Texas franchise-tax treatment is not. ^{5 6}

The second is the seller disclosure framework. The Texas Property Code §5.008 seller-disclosure requirement applies only to residential property of one dwelling unit. Commercial property transactions are exempt. The practical effect is that the exchanger acquiring Texas commercial property cannot rely on the statutory seller-disclosure framework that operates in some other states; due diligence is fully buyer-side. Environmental, geotechnical, structural, and lease-condition diligence belongs in the buyer’s acquisition workflow, with no statutory disclosure backstop. ²⁰

The third is mineral rights. Texas conveys surface estate and mineral estate separately by default, and the two are commonly severed. A title commitment on Texas real property must be reviewed for mineral severance, surface use waiver, and the rights of the mineral estate to access the surface for exploration. For investment property in unconventional resource basins (Permian, Eagle Ford, Haynesville, Barnett) and for property in the urban Houston area where shallow mineral activity has occurred historically, the severance analysis is material. Texas-licensed counsel with oil-and-gas title experience should review the mineral chain.

The fourth is the community property treatment. Texas is a community property state under Texas Family Code Title 1 Subtitle B. Property acquired during marriage is presumptively community property; the federal tax treatment under IRC §1014 provides a full step-up in basis at the death of either spouse on community property held jointly. The interaction between community property and §1031 deferral is well-developed in Texas estate-planning practice and should be reviewed with a Texas-licensed estate-planning attorney as part of any large or generationally held exchange.

The fifth is the property tax loan market. Texas permits property-tax lending, in which a third-party lender pays the borrower’s delinquent property tax to the taxing authority and receives a tax lien transferred under Texas Tax Code §32.06. The market is large, sometimes active in the same submarkets where the exchanger is buying, and can affect the title picture on properties acquired at or near foreclosure. The title commitment review should account for transferred tax liens.

§6. Closing summary and the work ahead

The Texas 1031 exchanger is operating in a market with a clear set of distinguishing features. The federal floor applies; there is no state income tax and therefore no state-level deferral question; the franchise tax catches LLCs on pure investment property and makes entity choice a tax-planning decision; the property-tax effective rate is the seventh-highest in the country with no Prop-13-style cap on investment property; the homestead protections do not extend to investment property; coastal property carries TWIA exposure with rates below actuarial adequacy and a real deficit; demographic growth remains the largest in the country in absolute terms though the rate has slowed; the metropolitan absorption is concentrated in Houston, DFW, Austin, and San Antonio with the suburban-county pattern accelerating; commercial property transactions sit outside the statutory seller-disclosure regime; mineral severance is the default rather than the exception. None of these is a reason to avoid a Texas exchange. Each is a reason to underwrite one carefully. The jurisdiction-specific factors above are starting-point context. A state-experienced CRE professional will translate them into deal-specific judgment.

This is the question Shop 1031 was built to compress. Every Texas offering memorandum on the platform is normalized to a single schema, underwritten at re-let to the buyer’s specific equity, debt, and DSCR floor, and ranked by Dark Shell Score. The buyer searches a pre-cleared field rather than reading offering memoranda to disqualify them. For a market with Texas’s specific overlay, that compression is decisive because the variables that move outcomes (entity choice, annual reappraisal exposure, TWIA pricing trajectory, mineral severance review) are knowable in advance and frequently missed in conventional buy-side workflows.

This page is the working map. The actual exchange is run by people. A Texas-licensed real estate attorney, a Texas-licensed CPA familiar with §1031, a Qualified Intermediary, and a CRE professional who knows this market and these properties. Shop 1031 is the analytics layer that triages which deals deserve your time. The professionals do the work.

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Shop 1031 is an independent analytics platform. We are not a brokerage, a law firm, a tax advisor, a lender, or a Qualified Intermediary. Every 1031 exchange should be reviewed by a state-licensed real estate attorney, a CPA familiar with IRC §1031, and a QI. Brokerage and advisory services, when used, are provided by independently licensed third parties under separate engagement. This page is research, not advice. The Texas-specific surfaces discussed (franchise-tax entity choice between LP and LLC, annual appraisal reassessment without a homestead cap on investment property, TWIA coastal exposure and the post-Beryl rate trajectory, mineral severance and surface-rights review, community-property treatment of investment real estate) each carry material risk if mishandled and should be addressed with a Texas-licensed attorney, a Texas-licensed CPA, and a Qualified Intermediary before identification, not after.

Federal authority: 26 U.S.C. §1031; 26 C.F.R. §1.1031(k)-1; IRS Pub. 544; IRS Pub. 555.

Texas authority: Tex. Tax Code Ch. 171 (franchise tax), §171.0003 (passive entity), Ch. 23, Ch. 25, §23.23 (homestead cap), §32.06 (tax-lien transfer), Ch. 41, Ch. 42; Tex. Ins. Code Ch. 2210 (TWIA); Tex. Prop. Code §5.008; Tex. Fam. Code Title 1 Subtitle B (community property).

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