Can You Exchange US Property for Foreign Property Using Section 1031?

Foreign 1031 Exchange

The rules on foreign exchanges are set out in I.R.C. Section 1031(h).

Remember that in order to qualify for tax deferral, the exchange must be of like-kind property. In 1031(h) Congress made it so property located in the United States and property located outside the United States are NOT considered to be like kind.

1031 Exchanges Involving US Territories

The next Logical Question is what about US Territories such as: Guam, Puerto Rico and the U.S. Virgin Islands. Can You exchange US Property for property in the US Territories?

According to Private Letter Ruling 200040017, the answer appears to be a limited YES but the authority is ONLY to the U.S. Virgin Islands and ONLY if the USVI Replacement Property is held to produce income.  Guam and Puerto Rico may not qualify because the IRS has not ruled on specifically on them.  The Internal Revenue Code only defines the "United States" to include states and the District of Columbia.

It seems strange, but the Internal Revenue Service has ruled that property located in the U.S. Virgin Islands qualifies for 1031 like-kind exchange treatment, provided it produces income for U.S. citizens and has left out Guam and Puerto Rico.

Foreign to Foreign 1031 Exchanges (Involving Only Non US property)

Remember US taxpayers can be taxed on income earned anywhere even income earned outside of the US.

One interesting point to keep in mind is that foreign property can be exchanged for other foreign property so theoretically, a US tax payer could exchange Non-US property for other Non-US property.  Any US taxpayer’s investing in other counties who sells foreign property held for investment or for use in a trade or business and who then buys other like-kind foreign property that’s also held for a qualifying purpose, should be aware that foreign property can be considered to be of like-kind to other foreign property.  So yes You Can Exchange foreign property of for other foreign property!

  • Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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