Texas

California to Texas

Selling California, Buying Texas

Two numbers pull owners toward Texas: no state income tax, and more building for the money. Neither is the number that gets people in trouble.

Trap

The one that does

Texas appraisal districts value income property by its income. Raise the rents on your Texas building and you have handed the appraisal district the evidence it needs to raise your assessed value. Improve the asset, improve the tax bill. There is no version of that in California, where Proposition 13 cut assessed value loose from performance decades ago and never reconnected them.

Then there is California, which does not let go. The gain from your sale stays California-source gain, and the state wants a filing every year to prove it still knows where that gain lives. Both sides of that trade, below.

1031

The 1031 part, briefly

Four Points That Matter for a Texas Trade

State lines do not break it. The only geographic limit is that real property in the United States is not like-kind to real property outside the United States. (IRS, Like-Kind Exchanges)
45 days to identify replacement property in writing, 180 days to close, both from transfer of the relinquished property, and the 180 shortens to your return due date including extensions if that comes first. (IRS, Form 8824 Instructions)
You never touch the money. A Qualified Intermediary holds it. Your agent, attorney, accountant, or a related party cannot serve, because the IRS treats them as disqualified persons.
Withholding at closing. California normally withholds 3 1/3% of the sale price. A properly structured exchange is exempt at transfer, but boot over $1,500 is withheld on, and a failed exchange means withholding on the full price. (FTB, 2026 Form 593 Instructions)

Full mechanics live on the 1031 exchange hub.

California keeps its claim on the gain

The Clawback, in Short

The clawback. R&TC §18032 (individuals, estates, trusts, pass-throughs) and §24953 (corporations) apply when gain from the exchange of California property goes unrecognized under IRC §1031 and the replacement property sits outside California. Both came from Assembly Bill 92 and apply to exchanges in taxable years beginning on or after January 1, 2014. California’s position: gain from California real estate is California-source income, and deferring it does not change where it came from.
The annual filing. FTB Form 3840 is an information return tracking where the deferred gain went. The FTB says it must generally be filed for the taxable year of the exchange and for each subsequent taxable year until the California-source deferred gain or loss is recognized. Hold the Texas building twenty-two years and that is twenty-two filings. It ends with a Final FTB 3840 explaining how the gain was recognized.
Moving does not end it. The FTB is blunt: taxpayers must file regardless of residence status or commercial domicile. Texas license, Texas voter registration, Texas everything. The gain is still California-source.
Stop filing and California gets to guess. Under §18032 the FTB may make an estimate of the net income from any available information, and may propose to assess tax, interest, and penalties. It does not have to prove you sold anything. You argue your way out years later with whatever records you still have.

Full detail on the California 1031 clawback page and the FTB Form 3840 page. (FTB, Reporting Like-Kind Exchanges | 2025 Form 3840 Instructions)

Trigger

What actually triggers the California bill

The Tax Comes Due When the Gain Is Recognized

Filing the 3840 costs nothing but time. The tax comes due when the gain is recognized, which the FTB ties to the moment the like-kind property received is sold or disposed of in a subsequent taxable transaction.

A taxable cash sale is the trigger. Another 1031 keeps the clock running instead: the gain rides along to the new replacement property and you keep filing.
Texas offers no offset. No individual income tax means no Texas tax to credit against a California bill. How California’s other state tax credit rules interact with a clawback recognition event is a question for your CPA.
The rate is not gentle. California’s 2025 rate schedules contain no separate long-term capital gains rate, and the top bracket is 12.30%, plus a 1% Behavioral Health Services Tax above $1,000,000 of taxable income. A large deferred gain landing in one year can push you there whether or not you normally live there. Confirm treatment with your CPA.
Depreciation recapture belongs here too. Model it before you sell.

Figures are illustrative of the rules, not a projection for any specific sale. Confirm your own numbers with your CPA.

Texas, honestly

The Genuinely Good Part

No personal income tax, and it is constitutional. Article VIII, Section 24-a bars the legislature from imposing a tax on the net incomes of individuals, including an individual’s share of partnership and unincorporated association income. Adopted by voters November 5, 2019. Not a policy that flips next session. (Texas Constitution, Art. VIII, Sec. 24-a)
No real estate transfer tax, also constitutional. Article VIII, Section 29 bars any law imposing a transfer tax on a transaction that conveys fee simple title to real property after January 1, 2016. If you have written a check for California documentary transfer tax, that line disappears. (Art. VIII, Sec. 29)

Loop

The feedback loop nobody from California sees coming

Your Rent Roll Is Appraisal Evidence

Texas Tax Code 23.012 tells the chief appraiser to value income-producing property by the income method. The statute directs the appraiser to analyze comparable rental data, comparable operating expense data, and comparable capitalization or discount rate data, and to base projections of future rent and expense on reasonably clear and appropriate evidence. Read that as an operator, not a lawyer. Your rent roll is appraisal evidence. Your operating statement is appraisal evidence. (Texas Tax Code 23.012)

You buy a tired Texas building and push rents 18% over two years.
The income approach picks that up.
Your appraised value rises, and so does your bill.
Part of the NOI you just created flows back out as tax, every year, not only at sale.

California trained you out of expecting this. Proposition 13 caps the rate at 1% plus voter-approved bonded indebtedness and generally limits annual increases in base year value to no more than 2%, except on a change of ownership or new construction. (California BOE, Publication 29) Reassessed once at purchase, then a slow creep for decades no matter how well you run the asset. In Texas, performance and assessment are connected on purpose. Districts value at market value as of January 1 each year, and appraisal plans must provide for reappraisal at least once every three years. In active markets they move faster. (Texas Comptroller, Property Tax Basics | Tax Code 25.18)

So a value-add plan in Texas needs the tax line modeled as a variable that tracks your own NOI, not a fixed cost drifting up 2% a year. If your pro forma escalates taxes at a flat percentage, it is wrong.

Rate

How high, honestly

Directional, Not an Underwriting Input

The comparison. The Tax Foundation puts Texas at a 1.40% effective property tax rate and California at 0.70%. Double.
Read that figure carefully. Those are rates on owner-occupied housing value, not commercial property. Directional signal, not an underwriting input. The direction is not in doubt.
Property tax does the work income tax does elsewhere. In Texas it is 40.7% of total state and local tax revenue, on Tax Foundation fiscal year 2023 data.
There is no state property tax. It is all local. Cities, counties, school districts, and special districts each set a rate and each bills you. Your total is the sum of every overlapping jurisdiction, so underwrite the parcel, not the county. Two buildings a few miles apart can carry very different rates because of a school district boundary or a Municipal Utility District.

(Tax Foundation, Texas | Tax Foundation, California | Texas Comptroller) Rates are illustrative of scale, not a quote for any parcel. Confirm current figures with the county and your CPA.

23.231

The circuit breaker is on its way out

Do Not Build a Hold Model on It

Texas Tax Code 23.231 caps the annual increase in appraised value on qualifying non-homestead real property at 20%, under an indexed value threshold the Comptroller publishes as $5,000,000 for 2024, $5,160,000 for 2025, and $5,320,000 for 2026.

It is authorized for three tax years only. Travis Central Appraisal District puts it plainly: the Texas Legislature has currently only authorized the circuit breaker limitation for the 2024, 2025 and 2026 tax years. Subsection (k) of Tax Code 23.231 reads “This section expires December 31, 2026,” and the Comptroller still publishes that expiration. If you are reading this in 2027 or later, assume the limitation has lapsed unless a later session extended it, and confirm current status before you lean on it.
A new buyer does not have it in year one anyway. Eligibility requires ownership through a prior full year.
And 20% was never protection. It is a ceiling on how fast a bad year can get worse. Do not build a hold model on it.

(Texas Tax Code 23.231 | Texas Comptroller, Valuing Property | Travis Central Appraisal District)

Protest

Protest is annual asset management

A Line in the Budget

Deadline. May 15, or 30 days after the district mails your notice of appraised value, whichever is later. The clock runs from the mailing date, not the day you open the envelope.
Grounds. Value, exemptions, special appraisal qualification, the circuit breaker limitation, and equal and uniform appraisal. That last one is the strong one. It lets you argue your property is appraised above comparable properties measured by the median level of appraisal, even when the district’s value opinion is defensible on its own.
Informal first. Request an informal conference before the formal hearing. Many protests settle there.
Then the ARB. At least 15 days notice. Appear in person, by phone, by videoconference, or by written affidavit. The decision binds one tax year only, which is why this repeats annually.

If you lose at the ARB, the appeal paths:

Path	Eligibility	Deadline	Cost note
District court	General	File within 60 days of the ARB’s written order	Partial tax payment usually required before the delinquency date
SOAH	Appraised value over $1 million, value or unequal appraisal only, not industrial	Notice of Appeal within 30 days	$1,500 deposit within 90 days
Binding arbitration	Residence homesteads at any value, or property valued at $5 million or less	Request within 60 days of the ARB order	Deposit required

(Texas Comptroller, Appraisal Protests and Appeals)

3.5%

Rate limits are not a cap on your bill

The Nuance That Costs Money

Most non-school taxing units have a voter-approval rate producing roughly prior-year revenue plus 3.5% for operations. Special taxing units, including junior college and hospital districts, get 8%. School districts calculate differently. Exceed the voter-approval rate and the unit holds an election. (Texas Comptroller, Truth-in-Taxation)

The nuance that costs money: 3.5% constrains revenue growth for the taxing unit, not your bill. If your appraised value rises faster than the district average, your bill climbs well past 3.5% while every unit stays compliant. Which loops back to the income method.

File

Two filings and a due date

What Else Lands in Your Inbox

Franchise tax. A privilege tax on each taxable entity formed or organized in Texas or doing business in Texas. No-tax-due threshold of $2,650,000 in total revenue, rates of 0.375% for retail and wholesale and 0.75% for everything else, report due May 15. The threshold is adjusted periodically, so confirm the current-year figure. (Texas Comptroller, Franchise Tax)
The passive entity trap. Under Tax Code 171.0003 a passive entity must be a partnership or a non-business trust for the entire accounting period, so an LLC does not qualify, and at least 90% of income must be passive. Rental income is generally treated as active for that test. Registered passive entities still file annually to affirm status. Have your CPA and a Texas attorney review your holding structure before closing. (Passive Entities FAQ)
Rendition. If the property involves business personal property, furniture, fixtures, machinery, equipment, or inventory, you may owe an annual rendition, a good-faith estimate of value as of January 1, due April 15 to the county appraisal district. Applicability depends on property type, so confirm it.
Miss the rendition and the penalty is automatic: 10% of the total amount of taxes imposed on the property for that year by taxing units participating in the appraisal district. (Texas Tax Code 22.28)
Payment rhythm. Bills become due October 1 and are delinquent February 1, when penalties and interest start. Different cash flow shape than California’s two installments. Set reserves accordingly.

Watch

Four things that surprise people

The Four People Miss

The first tax bill

Most investors underwrite off the seller’s current bill. Then the district reappraises at market value as of the next January 1. Underwrite at your basis.

Improving the property raises the tax

Better NOI can mean higher appraised value, annually, not just at sale. Texas Tax Code 23.012.

The rate is a stack

City plus county plus school district plus special districts. Two comparable buildings, two different rates.

California is still there

The Form 3840 obligation runs every year, and the deferred gain is a real liability with no due date until you sell. Ask your CPA to keep it on a schedule you can find in fifteen years.

Choose

Keep or sell

Questions Owners Ask on This Route

Yes. The IRS treats U.S. real property as like-kind to other U.S. real property, so California to Texas qualifies. The only geographic limit is that U.S. property is not like-kind to property outside the United States. What changes is state reporting: California requires an annual Form FTB 3840 and keeps its claim on the deferred gain.

California keeps the right to tax gain that originated from California real estate even after you exchange into out-of-state property. It comes from Revenue and Taxation Code sections 18032 and 24953, added by AB 92 and applicable to exchanges in taxable years beginning on or after January 1, 2014. Sell the out-of-state property in a taxable transaction and California expects tax on its portion of the gain.

Yes. The FTB states the filing requirement applies to all taxpayers who exchange California real property for out-of-state property regardless of residence status or commercial domicile. Changing residency does not change the California-source character of the gain.

Differently, and usually faster. Proposition 13 generally caps California increases in assessed value at 2% absent a change in ownership or new construction. Texas districts appraise at market value as of January 1 each year, reappraise at least once every three years, and for income-producing property use the income method under Tax Code 23.012, so rising rents can drive rising appraised value. A 20% circuit breaker applies to qualifying non-homestead property under an indexed threshold of $5,320,000 for 2026. The Legislature authorized it for the 2024, 2025 and 2026 tax years only, and Tax Code 23.231 states it expires December 31, 2026. If you are reading this after 2026, confirm whether a later session extended it. Eligibility also requires ownership through a prior full year, so a new buyer does not have the cap in year one.

Not automatically. No individual income tax and no transfer tax, both constitutionally protected. But Texas property taxes run roughly double California’s, with the Tax Foundation showing 1.40% against 0.70%. Those figures cover owner-occupied housing, not commercial property, so read them as direction, not as an input. Property taxes are 40.7% of Texas state and local tax revenue. Whether Texas is cheaper depends on the parcel, your income profile, and your hold period.

It depends on your entity and revenue. The tax applies to taxable entities formed or doing business in Texas. Entities at or below $2,650,000 in total revenue may owe none, and rates are 0.375% for retail and wholesale and 0.75% for everything else. The passive entity exemption is narrow: partnerships and non-business trusts only, so an LLC does not qualify, and rental income is generally treated as active for the 90% test. Registered passive entities still file. Have your CPA review your structure.

Connect

Talk it through before you commit

Weighing a California sale against a Texas buy?

Matt Bingaman works Greater Sacramento commercial real estate, and this is the work he does. A short conversation now is worth more than a correction later. Fifteen minutes, no pitch. Matt is not a tax or legal advisor and coordinates closely with your CPA and Qualified Intermediary.

Schedule a 15-min call Call (916) 513-0217

Matt Bingaman | Commercial Advisor, Commercial Land & Luxury | eXp Commercial | CA DRE #02139034 | California statewide, with commercial advisory across Greater Sacramento and El Dorado County

Keep reading

This page is general information about how 1031 exchanges and California’s clawback rule work. It is not tax advice, legal advice, or a recommendation about your situation. Matt Bingaman is a Commercial Advisor and a licensed California real estate salesperson, CA DRE #02139034, eXp Commercial. He is not a CPA or an attorney. Tax rules change, and the right answer depends on facts this page cannot know. Before you act, talk to your CPA and a Qualified Intermediary.