1031 Exchanges Outside of the United States: Are They Possible?

By Emma V. Connely

Section 1031 gives real estate investors a wonderful gift in the form of a tax deferral, a kind of 'interest-free loan' from Uncle Sam. This may give you cause to wonder why the government would see fit to do this. As a matter of fact, section 1031 is not a naked gesture of goodwill, but a calculated, mutually beneficial arrangement. Giving investors the ability to place their assets in the best investments possible stimulates the U.S. economy, creating new jobs and new opportunities for Americans.

By this logic, it wouldn't make sense to allow 1031 exchanges to be made on properties overseas, and this is indeed prohibited. Section 1031 is at least partially intended to encourage investors to invest in property located in the U.S., both for the sake of the economy and because it can be difficult or impossible for taxes to be collected on foreign property (remember that a tax deferral is more of a loan than a gift, and the IRS expects to collect on this loan in the event that you sell a replacement property outright).

In private letter rulings relating to the U.S. Virgin Islands, the IRS has ruled that a property must be income-producing in order to meet like-kind requirements. This is a more constricted definition of a like-kind exchange than that which is normally applied to exchanges made on properties in the United States, which merely requires that your property be held for the purpose of business, trade or investment.

So if you are planning on exchanging a U.S. property for one located outside of the fifty states (plus Washington D.C.), you would be wise to take a second look at the legal precedents involved to ensure that the property will satisfy all like kind requirements, and if you are uncertain, it might be idea good idea to request a private letter ruling on your particular case.

About the Author:

United States property investors can save big money by utilizing a 1031 exchange to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is similar to an interest free loan from Uncle Sam!