Short answer: No. You can't 1031 exchange US property into foreign property, because IRC §1031(h) treats US and foreign real property as not like-kind, so the sale is fully taxable. You can exchange foreign investment property for other foreign investment property, but the 45-day and 180-day deadlines and a qualified intermediary still apply.
Reviewed by Jon Hilley. Last updated September 29, 2026.
A 1031 exchange for foreign property only works in one direction: foreign for foreign. The statute draws a hard line at the US border, so selling a US rental and buying an apartment in Lisbon or a beach house in Costa Rica is a taxable sale, no matter how the deal is structured. The rule is one of the few exceptions to the otherwise broad like-kind standard in the 1031 exchange rules.
If you already own investment real estate abroad, the picture changes. A US taxpayer can sell foreign investment property and buy other foreign investment property, and the gain is deferred for US federal income tax purposes. The other country, however, has its own tax system and generally won't recognize a US 1031 exchange.
Key rules
- US and foreign property are not like-kind: real property located in the United States and real property located outside the United States cannot be exchanged for each other (IRC §1031(h)).
- Foreign for foreign can qualify: foreign real property held for investment or business use can be exchanged for other foreign real property held the same way (IRC §1031(a)(1); IRC §1031(h)).
- Same deadlines apply: you must identify replacement property within 45 days and close within 180 days, or by your return due date if earlier (IRC §1031(a)(3)).
- No touching the proceeds: a qualified intermediary must hold the sale money, even when the closing happens overseas (Treas. Reg. §1.1031(k)-1(g)(4)).
- Foreign sellers of US property face withholding: when a foreign person sells US real property, the buyer generally withholds 15% of the amount realized unless the IRS issues a withholding certificate (IRC §1445; Form 8288-B).
Why the IRS treats foreign property differently
For US real estate, like-kind is broad: land, apartments, retail, warehouses and single-family rentals are all like-kind to each other. Congress carved out location as the one physical feature that matters. The practical effect is that US gains stay in the US tax base unless they are reinvested in US property.
The line runs both ways. You also can't sell a foreign rental and buy a US rental as a 1031 exchange. Each side has to be on the same side of the border.
What counts as the United States?
For this rule, the United States means the 50 states and the District of Columbia (IRC §7701(a)(9)). Real property in Puerto Rico and other US territories is generally treated as foreign. Treasury regulations carve out limited exceptions for the US Virgin Islands, Guam and the Northern Mariana Islands that can apply in some situations, so get advice before you sign a contract on territory property.
Foreign for foreign: an international 1031 exchange
US citizens and residents are taxed on worldwide income, so a sale of a foreign rental is reportable here. If you reinvest in another foreign investment property, you can defer the US gain the same way you would domestically: written exchange agreement, a QI holding the funds, identification by day 45, closing by day 180, and Form 8824 filed with your return.
A few practical points make these exchanges harder than domestic ones:
- Local taxes: the country where the property sits may tax the sale in full, since it has no reason to follow US law. A foreign tax credit may offset some US tax on the same gain, but when the US gain is deferred and the foreign tax is paid now, the timing may not line up.
- Moving money: some countries restrict transfers out of the country, which matters when a qualified intermediary has to hold the proceeds.
- Currency: your gain for US purposes is measured in dollars, so exchange-rate moves can create or shrink gain.
- Closing mechanics: many countries use notaries and closing processes that aren't built around assigning a contract to an intermediary, so plan the paperwork early.
Foreign owners of US property and FIRPTA
A foreign investor who owns US real estate can do a 1031 exchange into other US real estate. The complication is FIRPTA withholding: the buyer is generally required to withhold 15% of the amount realized. If the sale is part of a valid exchange, you can apply for a withholding certificate on Form 8288-B to reduce or eliminate the withholding, which keeps the full proceeds available for the replacement purchase. Start that application before closing.
Example: selling a US rental to buy abroad
Assume you sell a US rental and use the proceeds to buy an apartment overseas. Numbers assume a 15% federal capital gains rate, 25% on the depreciation portion, plus the 3.8% net investment income tax; state and foreign tax not included.
- Net sale price of US rental: $800,000
- Adjusted basis: $500,000
- Realized gain: $300,000
- Depreciation taken (taxed at 25%): $100,000 x 25% = $25,000
- Remaining gain (taxed at 15%): $200,000 x 15% = $30,000
- Net investment income tax: $300,000 x 3.8% = $11,400
- Total federal tax: $66,400
Because the replacement is outside the United States, none of the $300,000 gain is deferred. If you instead bought a US replacement property worth at least $800,000 and reinvested all the proceeds, the entire $66,400 would be deferred. You can run your own numbers with our capital gains vs 1031 comparison.
Other questions investors ask
How do I avoid capital gains tax on foreign property?
You can defer US tax on foreign investment property by exchanging it for other foreign investment property. If the foreign property was your main home for 2 of the last 5 years, the §121 exclusion of up to $250,000 ($500,000 married filing jointly) applies to foreign homes as well. Either way, the country where the property sits may still tax the sale.
Common mistakes
- Assuming "investment property" is enough: we see investors who plan a retirement property abroad and assume any rental qualifies. Location matters, and a US sale can only roll into US property.
- Treating a foreign exchange as foreign-tax-free: a foreign-for-foreign exchange defers US tax only. We regularly remind clients to get local tax advice in the country where the property sits.
- Leaving FIRPTA to the last week: foreign sellers who wait until closing to deal with withholding often see 15% of the price held back when they need it for the replacement.
