Island State

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

As a real estate investor, you probably are aware of the advantages of a 1031 exchange over outright sale of a property. A 1031 exchange defers your capital gains taxes, and keeps your finances working for you, and helps you by building your equity and enhancing your ROI. But 1031 exchanges are allowed not only for the good of the investor; by allowing investors to move their capital to the most advantageous investments, section 1031 stimulates the U.S. economy.

The fact that 1031 exchanges are intended to boost the U.S. economy poses the question of whether or not you can trade one property for another that is abroad. The short answer is no. The money you save by making a 1031 exchange rather than selling outright is considered a tax deferment, which means that although you are temporarily liberated from capital gains taxes, the U.S. government will still expect payment for your capital gains taxes if sell investment property at some point. It is difficult and sometimes impossible for the IRS to collect taxes on the sale of foreign property.

If 1031 tax exchanges are limited to the U.S. so that the economy will benefit and the IRS will be able to collect capital gains taxes in the future, then you may be wondering what rules apply to U.S. territories such as Guam, the U.S. Virgin Islands, and Puerto Rico. A private letter ruling has stated that the IRS requires a property in the Virgin Islands can only qualify as a like kind property for an exchange with another.S. property if it is income-producing, which is more restrictive than the normal requirements for a like-kind exchange, which merely state that the property must be held for your trade or business or as an investment.

So if you are considering making an exchange outside of the fifty states (and Washington D.C.), make certain that your replacement property will, in fact, be considered to be like-kind to the property that you are selling. In order to be absolutely sure, you may even want to request a private letter ruling on your particular case.

Investors in the U.S. can save a lot of money by using 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 the IRS..

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