International 1031 Exchange Guide

International 1031 Exchanges: What You Need to Know

One of the most common misconceptions about 1031 exchanges is that you can exchange US real estate for foreign real estate. Under current IRS rules, this is not permitted.

The Domestic Property Rule

IRC Section 1031(h) provides that real property located in the United States and real property located outside the United States are not like-kind property. This means:

You cannot exchange a US property for a property in Mexico, Canada, Europe, or any other country
You cannot exchange a foreign property for a US property
Foreign properties can only be exchanged for other foreign properties

Exchanging Foreign Property for Foreign Property

If you own investment real estate outside the United States, you can conduct a 1031 exchange by exchanging one foreign property for another foreign property. The same rules apply: you need a Qualified Intermediary, the 45-day identification period, and the 180-day closing deadline.

However, foreign property exchanges are significantly more complex due to:

Foreign tax laws and withholding requirements
Currency exchange considerations
FIRPTA (Foreign Investment in Real Property Tax Act) implications
Treaty considerations between the US and the foreign country

Strategies for US Investors With International Goals

If you want to eventually invest internationally, here are strategies to consider:

Continue exchanging within the US. Build your US portfolio through 1031 exchanges, deferring taxes and growing your equity base. When you eventually want to invest internationally, you can sell your US property, pay the deferred taxes at that time, and use the after-tax proceeds for international investment.

Delaware Statutory Trust (DST) investments. Some DST sponsors offer diversified real estate portfolios that may include international exposure through US-based entities that hold foreign assets.

REIT investments. Real Estate Investment Trusts that hold international properties are publicly traded and can be purchased with after-tax proceeds.

Get Expert Guidance on Your Exchange

1031 Federal Exchange provides nationwide QI services for all types of domestic exchanges. Attorney Steve Wolterman, CES can help you structure your exchange strategy.

Author

Steve Wolterman, Esq., CES

Attorney and Certified Exchange Specialist with over 20 years of experience guiding real estate investors through 1031 exchanges nationwide. Member of the Federation of Exchange Accommodators (FEA).