Take Care When Making 1031 Exchanges Outside of the U.S.

Section 1031 of U.S. tax code is based on the idea of a mutually beneficial relationship between the real estate investor and the U.S. economy as a whole. 1031 exchanges allow investors to put their capital to work in the most advantageous ways possible, which in turn stimulates the economy by creating more jobs and greater opportunity in the U.S. This is one major reason why 1031 exchanges cannot occur outside of U.S. territory. In addition, a tax deferment means that the IRS will want to collect your capital gains taxes in the event that you someday sell your replacement property, and it can be very difficult for them to collect taxes on the sale of foreign property.

The reasoning behind the prohibition of 1031 exchanges involving property in a foreign nation is clear, but things become a bit more hazy when you consider U.S. territories such as Puerto Rico, Guam, or the U.S. Virgin Islands. You are in fact permitted to make an exchange on a property in one of these territories, but it is essential to be cautious when making a transaction of this sort.

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 considering making an exchange outside of the fifty states (and Washington D.C.), make certain that your replacement property will, in fact, be considered to be like-kind to the property that you are selling. In order to be absolutely sure, you may even want to request a private letter ruling on your particular case.

Article Source: http://www.articlegoldmine.com

United States 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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