1031 Exchanges are primarily known for their tax deferral benefits, allowing you to keep more of your equity working. However, there are other benefits that arise in specific scenarios or geographic locations. In this article, Realized 1031 shares insights on Texas 1031 investment benefits. Keep reading to learn how exchanging Texas properties can provide additional advantages to your long-term investment goals.
All 1031 Exchanges in Texas provide the same benefits as exchanges in other states.
Beyond these benefits, one key feature of Texas tax laws elevates 1031 Exchanges into an even more powerful tax management tool: the lack of income tax. This advantage, along with the market conditions and regulatory environment in the state, can provide added flexibility and control for 1031 Exchanges.
Here are some of the ways Texas's tax landscape makes 1031 Exchanges even more advantageous.
Other states also levy capital gains taxes in addition to the federal tax, resulting in increased payments. In a 1031 Exchange, the state-level deferral for these jurisdictions applies, adding to transaction complexity.
Since Texas doesn’t have a state income tax — or capital gains taxes by extension — the taxes you defer will be purely at the federal level. This benefit makes exchanges administratively simpler and future-proof.
Texas has become one of the top destinations for exchangers selling properties in high-income tax states like California, New York, and New Jersey. As you enter the Texas market, you’re permanently eliminating exposure to future capital gains taxes at the state level. This benefit is especially appealing for retirees, investors simplifying their portfolios, and exchangers who are planning for long-term holds and reduced management involvement. It’s unsurprising that Texas has long been considered a landing state for multi-state 1031 Exchange strategies.
Texas itself has various market features that make it ideal for long-term holds that involve 1031 Exchanges. It’s seeing steady economic and population growth, resulting in more business and jobs being available.
You can also find diverse property types that provide a wide range of options, especially since “like-kind” only means properties held for business or investment use. Not only are the properties easily compliant with IRS rules, but the market itself has features that make it ideal for long-term investing.
States like California have dedicated add-ons to the already complex guidelines set by the IRS. These state-level rules can limit the type of properties you can exchange, require additional reporting (for clawback provisions), or impose special withholding rules.
Texas, since it doesn’t have state income tax, lacks any state-level 1031 Exchange rules. This benefit goes beyond simplifying the exchange. More complex exchanges, such as reverse and built-to-suit structures, can be executed more easily in the state. You can focus solely on meeting the federal requirements of these more complicated transactions instead of having to think about extra layers of state regulation.
While Texas has higher property taxes compared to other states, each county tends to have more transparent processes and rates. Plus, the property tax value isn’t tied to capital gain or income events. This means that you won’t encounter surprise reassessments tied to deferred gain. In addition, underwriting for replacement properties will be more predictable, which will benefit your overall tax management planning.
Exchanging in Texas gives you access to various other advantages beyond the initial tax deferral. Since the state doesn’t charge income tax or have state-specific 1031 rules, you only have to think about federal-level taxation and procedures, creating a cleaner and simpler exchange. Plus, Texas is an ideal market for long-term holds thanks to the growing economy and favorable tax landscape. The removal of these obstacles and the introduction of new opportunities make Texas an attractive destination for your future 1031 Exchanges.
https://www.irs.gov/pub/irs-news/fs-08-18.pdf
https://www.investopedia.com/terms/s/section1031.asp
https://www.investopedia.com/financial-edge/0210/7-states-with-no-income-tax.aspx