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

Section 1031 of U.S. tax code is based on the idea of a mutually beneficial relationship between the real estate investor and the U.S. economy as a whole. 1031 exchanges allow investors to put their capital to work in the most advantageous ways possible, which in turn stimulates the economy by creating more jobs and greater opportunity in the U.S. This is one major reason why 1031 exchanges cannot occur outside of U.S. territory. In addition, a tax deferment means that the IRS will want to collect your capital gains taxes in the event that you someday sell your replacement property, and it can be very difficult for them to collect taxes on the sale of foreign property.

The fact that 1031 exchanges are intended to boost the U.S. economy raises the question of whether one can exchange a property for one located overseas. 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 want to collect the money if you sell your property at some point in the future. It is difficult and sometimes impossible for the IRS to collect taxes on the sale of foreign property.

But what if you would like to make an exchange on a property located in Guam, Puerto Rico, or another U.S. territory? According to a precedent set by a private letter ruling relating to an exchange on a property located in the U.S. Virgin Islands, this is allowed, but the like-kind requirements on an exchange of this sort are more stringent than those that apply normally, in that a property located in a U.S. territory must be income-producing in order to qualify as like kind with one located in the United States proper.

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.

Article Source: http://www.articleselections.com

United States property investors can save a lot of 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 like an interest free loan from Uncle Sam!

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