What Are the 1031 Exchange Rules in Texas?

Posted by Colton Hoisager on Jun 24, 2022

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We’ve provided—and will continue to provide—a great deal of information about the 1031 exchange process. Much of the information in our blogs is based on the Internal Revenue Code, which involves federal legislation. But many states have their own regulations when it comes to successfully completing 1031 exchanges to help defer capital gains taxes. 

But Texas is not one of those states. When answering the question: “What are the 1031 exchange rules in Texas?” The answer is: The same as those on the federal level. No Texas law restricts or governs the like-kind exchange. In other words, conducting a 1031 exchange in Texas follows the exact same guidelines put forth by the 26 U.S. Code § 1031 – “Exchange of Real Property Held for Productive Use or Investment.”

A 1031 Exchange Refresher

When conducting a 1031 exchange, or a like-kind exchange as it’s sometimes known, the IRS requires the following:

  • Exchanges are permitted only for real property.
  • You have 45 days from the closing of your relinquished property to identify the replacement property.
  • You have 180 days from the closing of your relinquished property to close on the replacement property.
  • The entire process, from selling the relinquished property to closing on the replacement property, is conducted by a qualified intermediary. This is a true third-party entity, who should have absolutely no relationship to you.

It’s possible, under certain circumstances, to exchange into a personal residence, though this doesn’t fall under the category of a direct exchange. This method requires various rules and regulations pertaining to the length of hold, personal usage, and renting the asset at fair-market value.

Texas Statistics: Multifamily, Single Family, and Investments

There have been plenty of headlines in recent months detailing highly active commercial and residential real estate activity in the Lone Star State. 

Texas Realtors and the Real Estate Center at Texas A&M University tell the same story about single-family housing numbers. Specifically, while active listings were down during the early part of 2022, the median for-sale price has increased, as did the number of closed sales. Meanwhile the inventory hovered around one month (a market in balance has six months of housing inventory available). The Real Estate Center indicated that single-family construction permits in Austin and Dallas-Fort Worth fell by 10.7% and 0.3%, respectively. Houston’s increased by 9.1%, while San Antonio’s was up by 2.4%. 

When it comes to the multi-family sector, Yardi Matrix’s March 2022 reports concerning various Texas cities indicate the following:

  • Austin added 14,367 units in 2021 and generated $4.3 billion in multi-family asset sales.
  • Dallas-Fort Worth brought 24,635 units online in 2021 (the highest among all U.S. metros), with transactions totaling a record-breaking $13.9 billion.
  • Houston, which continues to recover from the pandemic, delivered 19,878 units in 2021; similar to Dallas, Oil City also reached an all-time high in transaction volume of $5 billion.
  • Finally, San Antonio’s construction pipeline has delivered 14,000 since 2020, while its sales volume in 2021 was $3.8 billion, a record-breaker for the region.

Finally, the Federal Reserve Bank of Dallas reported some potential headwinds for the Texas economy as supply chain issues and disruptions continue. Still, the unemployment rate declined, while the labor force continued to expand. The Dallas Fed’s Texas Business Outlook Surveys indicate steady employment growth and generally positive broader business conditions (even as uncertainty increases).

Though fundamentals might support more investment activity in Texas, before exchanging your current property for a duplex in San Antonio or a single-family rental in Dallas, it’s essential to perform due diligence on the replacement asset. Reviewing the 1031 exchange rules and regulations would be helpful, too.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor. There is no guarantee that the investment objectives of any particular program will be achieved. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that they will be able to pay or maintain distributions, or that distributions will increase over time. Programs that depend on tenants for their revenue may suffer adverse consequences as a result of any financial difficulties, bankruptcy or insolvency of their tenants. All real estate investments have the potential to lose value during the life of the investment. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor returns, and may outweigh tax benefits. Because they are private placements, TICs are illiquid securities. There is no secondary market for TIC investments. Moreover, the form of ownership may require unanimous consent to sell a TIC interest.

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