Recently, we had a client ask if it was possible to perform a 1031 exchange from a property located outside the United States to a replacement property in the United States. Exchanging properties between the US and foreign countries adds an extra layer of complexity to a 1031 exchange. Here are a few takeaways when it comes to non-US property and 1031 exchanges.
1031 Exchanges with Foreign or Non-US Property
Under the rules for 1031 exchanges “foreign or non-US property” is not considered like-kind to property in the US. IRC Section 1031 (h) has special rules for foreign real and personal property. It states that:
“Real property located in the United States and real property located outside the United States are not property of a like kind.”
So the short answer to our initial question is no, you cannot 1031 a piece of property in another foreign country into a new property in the United States. The properties are not considered like-kind, and are thus not eligible for the tax-saving benefits of a 1031 exchange.
Gross Income Made Outside the US
IRC Section 61 governs taxes on gross income.
US taxpayers can be taxed on income, gains and profits made outside the US. Under Section 61 of the Internal Revenue Code, “gross income” includes “all income from whatever source derived,” even foreign income.
So you could 1031 exchange foreign property for other foreign property to defer your US tax, or US property for other US property, but cannot mix them.