How To Do A 1031 Like-Kind Exchange Of Foreign Real Estate

“Kathleen, I have been following your and Lief’s publications for the past few years. I have flown to and checked out many of the places you’ve written about.

“I am concerned with the fact that all my eggs are in one basket, as they say, and I am therefore looking to diversify. Can you please tell me if a 1031 exchange extends beyond U.S. borders? I am looking to liquidate a few of my properties here in the United States and am wondering if I can choose a like property in Germany, Ecuador, and/or Panama.

“Thank you, in advance, for your answer to this e-mail.”

–Heidi W., United States

You can do a 1031 like-kind exchange with U.S. for U.S. property or with foreign for foreign property. You can’t do U.S. for foreign exchange or vice-versa. You’d have to sell your U.S. property and take the capital gains tax hit then use the proceeds to buy something overseas.

Then, when you sell your foreign property (if you do), you can do a 1031 like-kind exchange following the same rules and guidelines to invest in another foreign property, thereby deferring U.S. capital gains taxes.

Note, however, that, depending on what capital gains taxes you may be liable for in the country where the property is located (and sold), you may be better off forgoing the like-kind exchange and using the taxes paid in the foreign country to offset the amount of capital gains tax owed in the United States. If you do the exchange and defer the U.S. tax, you don’t benefit from the taxes paid in the foreign country.

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