As a real estate investor, you probably are aware of the advantages of a 1031 exchange over outright sale of a property. An exchange defers your capital gains taxes, keeps your money working for you, and helps to build equity and maximize your returns. But 1031 exchanges are allowed not only for the good of the investor; by allowing investors to move their capital to the most advantageous investments, section 1031 stimulates the U.S. economy.
By this logic, it wouldn't make sense to allow 1031 exchanges to be made on properties overseas, and this is indeed prohibited. Section 1031 is at least partially intended to encourage investors to invest in property located in the U.S., both for the sake of the economy and because it can be difficult or impossible for taxes to be collected on foreign property (remember that a tax deferral is more of a loan than a gift, and the IRS expects to collect on this loan in the event that you sell a replacement property outright).
But what if you would like to make an exchange on a property located in Guam, Puerto Rico, or another U.S. territory? According to a precedent set by a private letter ruling relating to an exchange on a property located in the U.S. Virgin Islands, this is allowed, but the like-kind requirements on an exchange of this sort are more stringent than those that apply normally, in that a property located in a U.S. territory must be income-producing in order to qualify as like kind with one located in the United States proper.
So if you are planning on exchanging a U.S. property for one located outside of the fifty states (plus Washington D.C.), you would be wise to take a second look at the legal precedents involved to ensure that the property will satisfy all like kind requirements, and if you are uncertain, it might be idea good idea to request a private letter ruling on your particular case.
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U.S. property investors can save big money by utilizing a 1031 exchange to defer all of their capital gains tax on the sale of investment property. A 1031 tax exchange is like an interest free loan from Uncle Sam!
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