1031 Exchange for an LLC
A 1031 exchange lets a real estate investor sell an investment property and roll the proceeds into a replacement property without immediately paying capital gains tax on the sale — named for Section 1031 of the Internal Revenue Code, the federal statute that authorizes it. Most Texas investors who use one hold the property through an LLC, and that combination raises questions the basic exchange rules don't answer on their own: what happens to the exchange when the seller is an LLC instead of an individual, what happens when the LLC has more than one member, and what Texas still expects from the entity once the exchange closes.
Start with what doesn't change: Texas has no state personal income tax, so unlike an investor in a state that taxes capital gains at the state level, a Texas seller isn't deferring a second, state-level tax bill on top of the federal one — the entire benefit of the exchange is the federal deferral. That makes the exchange itself simpler to reason about in Texas than in many other states. It doesn't make the entity-level questions go away, and those are largely about how the property is titled and who holds it, not about tax rate.
How the Exchange Works
Section 1031 allows the exchange of real property held for investment or business use for other real property held for the same purpose, deferring the capital gains tax that would otherwise be due on a straight sale. The properties don't have to be similar in type, size, or value to count as "like-kind" — raw land can be exchanged for a rental duplex, and a retail building can be exchanged for an apartment complex — what matters is that both properties are held for investment or business purposes rather than personal use. Since the Tax Cuts and Jobs Act of 2017, the exchange is limited to real property; equipment, vehicles, and other personal property used in a business no longer qualify.
The 45-Day and 180-Day Deadlines
The timeline is unforgiving. After closing on the sale of the relinquished property, the investor has 45 days to identify up to three potential replacement properties in writing, and 180 days from that same closing date to complete the purchase of one or more of them. There's no extension for a slow closing or a deal that falls through — missing either deadline collapses the exchange, and the investor owes capital gains tax on the original sale as if no exchange had been attempted.
Single-Member LLCs: The Exchange Works the Same as Direct Ownership
The IRS disregards a single-member LLC for federal income tax purposes by default — the LLC's activity is reported directly on the owner's own return as though the LLC didn't exist for tax purposes, even though it remains a separate legal entity for liability purposes. That treatment carries through to a 1031 exchange: the exchange is analyzed as if the owner sold and bought the property directly, and the owner can take title to the replacement property in the same single-member LLC, a different single-member LLC, or their own name without disturbing the exchange, because all three count as the same taxpayer to the IRS. What can't change is the taxpayer itself — moving the exchange proceeds to a different owner, even a close family member, breaks the same-taxpayer requirement described below.
Multi-Member LLCs: Why a "Drop and Swap" Happens
A multi-member LLC is taxed as a partnership by default, and a partnership interest is not itself real property — it doesn't qualify for 1031 treatment even though the real estate the partnership owns would. That becomes a problem the moment the LLC's members don't agree on what to do with the proceeds: if three members want to defer the gain into a new property and a fourth wants to cash out, the partnership can't do a partial exchange for just three of its four members. The common fix is a "drop and swap" — the partnership distributes the property to the members as tenants in common before the sale, converting each member's partnership interest into a direct, undivided real property interest, so each former member can independently decide whether to exchange their share or sell it and pay the tax. The IRS has challenged drop-and-swap transactions where the restructuring happens too close to the sale, on the theory that the tenant-in-common interest was never genuinely held for investment before being exchanged — timing and documentation both matter, and this is not a same-day fix.
The Same-Taxpayer Rule and a New LLC for the Replacement Property
Whoever sells the relinquished property has to be the one who acquires the replacement property — this is generally called the same-taxpayer rule, and the disregarded-entity treatment above is the main exception that gives it flexibility for an LLC owner. It's common for an investor to form a new LLC specifically to hold the replacement property, whether for liability separation from other assets or to match how the rest of a portfolio is structured. That's permitted, but the new LLC has to be owned by the same taxpayer that sold the relinquished property — typically as another single-member LLC owned by that same person or entity — and it has to be formed and ready to take title by the time the purchase closes, which means the Certificate of Formation filing needs to happen well inside the 180-day window, not after it.
Working With a Qualified Intermediary
A 1031 exchange requires a qualified intermediary — a third party who holds the sale proceeds between the two closings so the investor never has actual or constructive receipt of the money, which is what the exchange rules require to keep the transaction from being treated as a taxable sale followed by a separate, unrelated purchase. The intermediary role is defined in Treasury Regulation Section 1.1031(k)-1(g)(4), and the intermediary has to be engaged and the exchange agreement signed before the relinquished property closes, not after. Attempting the exchange without one, or bringing one in after the sale has already closed, is one of the most common ways an otherwise-valid exchange fails.
Texas Filing Obligations After the Exchange Closes
The 1031 exchange itself is a federal mechanism and doesn't touch Texas's tax system directly, but the LLC that ends up holding the replacement property does — the deferral doesn't pause the entity's ordinary filing obligations. Texas taxes LLCs through the franchise tax rather than an income tax: for 2026 and 2027, an entity with annualized total revenue at or below $2,650,000 owes no franchise tax and doesn't file a No Tax Due Report, but it still has to file the Public Information Report — or, for certain entities, the Ownership Information Report — by May 15 every year the LLC exists. The exchange doesn't create a new state obligation, but it doesn't excuse the existing one either. See Texas Franchise Tax and Public Information Report for the filing mechanics, and Texas Real Estate Holding Company Taxes for how depreciation, property tax, and the rest of a holding company's tax picture fit around the exchange.
What a 1031 Exchange Doesn't Cover
A primary residence doesn't qualify — the exchange is for property held for investment or business use, and a home the owner lives in fails that test regardless of how it's titled. A house bought specifically to renovate and resell quickly is also a poor candidate, since 1031 treatment depends on holding the property for investment rather than as inventory for resale. And the deferral isn't forgiveness: depreciation claimed on the relinquished property is recaptured and taxed as ordinary income if the replacement property is ever sold outright instead of exchanged again, so an investor who keeps exchanging indefinitely keeps deferring, but the deferred tax doesn't disappear until the property is sold outside the exchange chain — or, under current law, until it passes to an heir at a stepped-up basis.