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Hi this is Jeff Peterson – Professor 1031 with 1031Podcast.com. Today I am talking about 1031 exchanges involving foreign property.
Many people ask Can You Exchange of US property for foreign property such as property in Mexico or Canada?
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!
For more information call me (toll free) at 1-888-308-1031 or visit 1031Podcast.com.
