Many people ask about whether a 1031 exchange can be used to acquire international property outside of the United States. Frequently, someone will call and say, “Hey, we are selling this rental house, and what we’d like to do is buy this vacation house in Mexico. Is that allowed under the 1031 exchange rules?” The simple answer is no. You cannot sell a property in the United States and buy a property in a foreign country using a 1031 exchange.
If one sells property within the United States, he or she then needs to purchase the replacement property within the United States as well. Properties in the exchange can’t be exchanged between the United States and other countries, meaning properties in the United States can only be exchanged for others in the United States or territories owned by the United States, not in a foreign country.
However, one can go from state to state, so if one sells a property in Texas and then decides to purchase another in Delaware or Florida or Colorado, he or she can still use a 1031 exchange, but if one decides to purchase something in Switzerland or Mexico, one cannot use a 1031 exchange to do so.
It is possible to sell foreign property and buy replacement property internationally. Property can be exchanged from one country to another, as long as it is not in the United States. Whether this is a good approach is going to depend on the capital gains tax structures of the foreign countries. For example, because it has no capital gains tax, US taxpayers buying and selling in Belize can still take advantage of a 1031 exchange to defer their US capital gains tax. In some other countries, like France, the capital gains tax rate there is higher than the US so paying those taxes in France and taking them as a credit on your US tax return is often more beneficial.
If we can help you with a 1031 exchange in a foreign country or if you have more questions, take a look at the videos on the WealthBuilder 1031 Exchange YouTube channel, or give us a call at 888-508-1901 and we will be happy to help you.