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.



The fact that 1031 exchanges are intended to boost the U.S. economy raises the question of whether one can exchange a property for one located overseas. The short answer is no. The money you save by making a 1031 exchange rather than selling outright is considered a tax deferment, which means that although you are temporarily liberated from capital gains taxes, the U.S. government will still want to collect the money if you sell your property at some point in the future. It is difficult and sometimes impossible for the IRS to collect taxes on the sale of foreign property.

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.