Thinking about selling an Austin investment and rolling into a new Downtown opportunity without an immediate tax hit? A 1031 exchange can help you defer federal capital gains and depreciation recapture so more of your equity keeps working for you. If you own a small portfolio or you’re buying your first Downtown rental or mixed‑use property, knowing the ground rules is essential. In this guide, you’ll learn how the timelines work, the role of a qualified intermediary, the main exchange structures, and the Austin‑specific factors that can make or break your plan. Let’s dive in.
What a 1031 exchange does
A 1031 exchange lets you sell real property held for investment or business use and reinvest the proceeds into other like‑kind real property without recognizing gain at the time of the swap. The key benefit is deferral, not elimination; tax can be due when you sell in the future without another qualifying exchange.
Since 2017, exchanges apply to real property only. Personal property like equipment or furniture does not qualify. For U.S. taxpayers, both the relinquished and replacement properties must be located in the United States.
Individuals, partnerships, LLCs, and corporations can use 1031 exchanges, but the tax consequences vary by entity. Be sure your ownership structure and intent align with the rules.
Core rules and deadlines
A successful exchange depends on strict process control. Missing a step can jeopardize deferral.
Use a qualified intermediary
You cannot touch the sale proceeds. In a delayed exchange, a qualified intermediary (QI) holds your funds and manages the documentation from the sale of your relinquished property through the purchase of your replacement property. A reputable, experienced QI is standard practice in Austin.
Hit the 45/180-day windows
Two non‑extendable deadlines start the day you close on the sale:
- 45 days to identify replacement property in writing and deliver that identification to your QI.
- 180 days to acquire the replacement property and complete the exchange.
These windows run at the same time, so your acquisition must close within 180 days total.
Follow identification rules
You have several ways to identify properties during the 45‑day period:
- Three‑property rule: Identify up to three properties, any value.
- 200% rule: Identify any number of properties if their combined value is no more than 200% of the property you sold.
- 95% rule: Identify more than allowed above, then close on at least 95% of the total value identified.
Your identification must be clear and unambiguous. Work closely with your QI and agent to draft it accurately.
Watch boot and debt
Any non like‑kind value you receive is taxable boot. Cash back, personal property, or a reduction in mortgage debt can all create boot. To fully defer tax, most investors aim to buy equal or greater value and replace equal or greater debt.
Basis, depreciation, and future planning
Your replacement property’s basis generally carries over from the relinquished property, adjusted for any additional cash you add or boot you receive. Depreciation recapture is deferred inside a 1031, but it can be recognized later if you sell without another exchange. Plan ahead for how today’s basis affects tomorrow’s taxes.
Holding period and intent
There is no fixed IRS minimum holding period. The IRS looks at facts and circumstances to confirm investment or business intent. Many investors hold for at least a year or two, but suitability depends on your specific use and documentation.
Exchange types you can use
Different structures fit different Downtown Austin strategies.
Delayed exchange (most common)
Sell first, then buy within the 45/180 days using a QI. This is the go‑to structure for moving out of a rental home and into a Downtown condo, multifamily, or mixed‑use asset.
Reverse exchange
If you must buy first, a reverse exchange uses an Exchange Accommodation Titleholder to temporarily hold either the new or old property. This is more complex, can be costlier, and requires lender coordination.
Construction or improvement exchange
If you want to improve a replacement property, this option allows exchange funds to pay for renovations. All improvements that count toward the exchange must be completed within the 180‑day window.
Simultaneous exchange
Both closings happen the same day. It’s less common today but still possible with careful title and escrow coordination.
Fractional options: TIC and DST
- Tenancy‑in‑Common (TIC): You own a fractional deeded interest. Useful in some exchanges, but lenders may be more selective.
- Delaware Statutory Trust (DST): You acquire a passive fractional interest in a professionally managed property. Many small portfolio owners use DSTs to simplify management and diversify, but offerings vary and liquidity can be limited.
Downtown Austin scenarios to consider
Local examples can help you visualize timing and trade‑offs.
Scenario A: Single‑family rental to Downtown multifamily
You sell a rental home in East Austin, then identify one to three Downtown condo or multifamily options within 45 days. You close within 180 days and keep your debt and purchase price at or above the value you sold to avoid mortgage boot. Confirm HOA leasing policies and any rental caps before you identify.
Scenario B: Older retail to renovated mixed‑use
You sell a South Lamar storefront and target a Downtown mixed‑use building that needs upgrades. A build‑to‑suit improvement exchange allows renovations during the 180‑day period. You must plan contractor schedules carefully so qualifying improvements finish on time.
Scenario C: Consolidate into a DST
You sell several small rentals and roll into a DST that owns an institutional‑grade asset. You gain passive management and potential diversification. You still need to vet the sponsor, review offering documents, and understand liquidity constraints.
Scenario D: Buy a rare Downtown condo first
If a standout unit hits the market and won’t last, a reverse exchange can let you acquire now while your current property is being marketed. Expect higher complexity, special purpose entity mechanics, and tighter lender requirements.
Austin and Travis County factors
Local rules and taxes shape your replacement strategy and cash flow.
Texas state tax environment
Texas does not have a state personal income tax. For many Austin investors, the main benefit of a 1031 is deferral of federal capital gains and depreciation recapture. You should still budget for local property taxes and closing costs.
Travis Central Appraisal District (TCAD)
Travis County appraises property annually. A change in ownership can affect your appraised market value, which influences your property tax bill. A 1031 exchange for federal purposes does not change appraisal practices, and investors typically do not claim homestead exemptions.
City rules that affect Downtown investments
- Short‑term rentals: The City of Austin has licensing, zoning, and operating rules. If you plan to use a Downtown property as a short‑term rental, confirm current eligibility and permitting before you identify.
- Zoning and redevelopment: Downtown overlays, historic districts, and active redevelopment can open opportunities or limit uses. Verify zoning before you write your identification list.
- Condo and HOA policies: Many Downtown properties are condos, and HOA bylaws can include rental caps, lease term minimums, or special assessments. These directly affect cash flow and feasibility.
Financing and underwriting
Lenders may apply stricter criteria for reverse or improvement exchanges, TICs, and DSTs. Get pre‑approval early, and coordinate with your QI and lender to align closing timelines inside the 180‑day window.
Step‑by‑step planning checklist
Use this quick plan to stay on track from listing to replacement closing.
- Start early: align goals, target property types, and debt strategy before you list.
- Engage a qualified intermediary prior to going under contract on your sale.
- Line up your team: QI, CPA or tax advisor with 1031 experience, real estate attorney, and an Austin agent who knows Downtown inventory and HOAs.
- Secure lender pre‑approval and confirm any special exchange requirements.
- Draft a shortlist of replacement targets before day 1 of your 45‑day window.
- Deliver your written identification to the QI by day 45 using a clear rule.
- Manage inspections, HOA reviews, and financing to close within 180 days.
- Keep all exchange documents and settlement statements with your tax records.
Common pitfalls to avoid
- Touching sale proceeds instead of using a QI.
- Missing the 45‑day identification or 180‑day closing deadlines.
- Reducing debt or value and creating taxable mortgage boot unintentionally.
- Trying to exchange personal property or foreign property, which do not qualify.
- Overlooking STR rules or HOA restrictions that undermine your plan.
If you want a Downtown‑focused approach that protects timelines and targets the right buildings, our team can help you identify options, coordinate vendors, and negotiate strong terms. When you are ready to map out your exchange strategy and your replacement short list, connect with the Walker Residential Group.
FAQs
What is a 1031 exchange for Austin investors?
- A 1031 lets you sell investment real estate and reinvest into other U.S. real property while deferring federal capital gains and depreciation recapture.
How do the 45‑day and 180‑day deadlines work?
- You have 45 days after selling to identify replacement properties and 180 days total to close on them, and both periods start on your sale closing date.
Can I exchange into a Downtown Austin condo?
- Yes, condos can qualify if held for investment or business use, but review HOA leasing rules, rental caps, and special assessments before identifying.
How do Travis County property taxes affect my exchange?
- A 1031 does not change appraisal, and TCAD’s annual valuation can impact your tax bill; budget for property taxes when modeling cash flow.
Can I use a 1031 for a Downtown short‑term rental?
- Potentially, if the property is held for investment, but confirm current City of Austin STR eligibility and permitting before you identify.
