Put simply, you can defer (possibly forever, if you meet a certain condition which I'll share in a moment) capital gains taxes on the profits from the sale of a foreign property if you use the proceeds of the sale to buy another foreign property.

I've helped people perform these types of exchanges (Section 1031 or ?like kind? exchanges) for the past six years. I can help you, too, but first, a couple of caveats:

1. You can't exchange U.S. real estate into foreign real estate. This is a source of some confusion, probably dating back to a time before ?like kind? property was clearly defined and codified by the IRS. Although there have been cases where a 1031 exchange of U.S. real estate for foreign property has been performed when the replacement property was in Puerto Rico or the U.S. Virgin Islands, the cold hard fact is that today you cannot 1031 exchange U.S. property for foreign real estate in most parts of the world.

2. Unless you perform a 1031 exchange, Uncle Sam will be sitting silently at the closing table with you waiting for his 15% share of the profits, whether the real estate being sold is in Paris, San Miguel de Allende, or Buenos Aires.

Please note that you must 1031 exchange the entire proceeds of the sale (less selling expenses), not just the profit or there will be ?cash boot,? and taxes due. Further, if you have a mortgage on the property being exchanged you are required to have a mortgage (for an equal or greater amount) on the new property to avoid ?mortgage boot?.

The Good News

If you 1031 exchange foreign property it doesn't have to be in the same country to meet the ?like kind? requirement. For example, you could 1031 exchange the proceeds of a sale from a Paris condo into beachfront property on Roatan.

Plus, you can 1031 exchange a single foreign property for multiple foreign properties'or 1031 exchange multiple foreign properties for a single foreign property--so long as the exchange is balanced, i.e. the value of all ?relinquished property? is equal to or greater than the value of all ?replacement property.?

So, you could, after 10 years of shrewd buying, sell your Paris condo, Roatan beach home, and Cancun beachfront lot, all worth a total of $1.5 million?and exchange the proceeds for a lovely $1.5 million Tuscany villa complete with vineyard (or visa versa)?and defer the capital gains tax you would otherwise owe Uncle Sam.

Remember when I said there was one condition that would allow you to defer the capital gains tax forever? Well, it's good news for your heirs--that ?condition? is when you die. At that point, your heirs will inherit your property on a ?stepped up basis? meaning at ?fair market value at the time of you death.? Ergo, no capital gains taxes will be paid by them (although they may owe estate tax).

Used properly, 1031 exchanging can eliminate equity shrinkage when you sell a property, therefore giving you more money to buy your next property. This can be repeated again and again, until your heirs inherit the property and pay no taxes for your 1031 exchange activities.