Short answer
Section 1031 treats U.S. real estate and foreign real estate as two separate worlds. You can't exchange U.S. property for property abroad, or the reverse, because IRC §1031(h) says they are not like-kind. You can exchange foreign property for other foreign property, such as a rental in Mexico for one in Portugal. Foreign investors can exchange U.S. property for other U.S. property, but buyers must withhold 15% of the price under FIRPTA unless the IRS approves a reduction first. The country where the foreign property sits may also tax the gain, whatever U.S. law says.
| You sell | You buy | 1031 allowed? |
|---|---|---|
| U.S. rental | U.S. rental | Yes |
| U.S. rental | Foreign rental | No |
| Foreign rental | U.S. rental | No |
| Foreign rental | Foreign rental, any country | Yes, for U.S. tax purposes |
| U.S. property, foreign seller | U.S. property | Yes, but FIRPTA withholding applies unless reduced |
| U.S. property, foreign seller | Foreign property | No, and the gain is taxed in the U.S. |
On this page
The rule in the statute
IRC §1031(h) says real property located in the United States and real property located outside the United States are not property of a like kind. Inside each group, the normal rules apply: the property must be held for business or investment, the timelines are the same, and you need a qualified intermediary for a delayed exchange. U.S. territories raise their own questions; see 1031 exchanges and the Virgin Islands.
For U.S. owners of property abroad
U.S. citizens and residents are taxed on worldwide income, so selling a rental in Costa Rica or Spain creates U.S. gain. A foreign-for-foreign exchange can defer the U.S. tax.
- Both properties must be outside the U.S. They don't need to be in the same country.
- Local tax still applies. The country where you sell may tax the gain and may not recognize a 1031 exchange. If you pay foreign tax and defer the U.S. tax, you may not be able to use a foreign tax credit for it now. Run this with a cross-border CPA before you sell.
- The QI process must fit local practice. Many countries close through a notary, and funds may need to move across currencies. The QI must hold the money and you must not receive it. Plan wires and currency conversion in advance.
- Currency changes can create gain. Gains or losses from currency conversion are a separate issue from the property gain.
- Vacation homes abroad. The same personal-use limits apply as for U.S. vacation homes. See second homes and 1031.
Our post on New Zealand and international exchanges has another country example.
For foreign investors with U.S. property
A nonresident who sells U.S. real estate is taxed in the U.S. on the gain under IRC §897. A foreign investor can still exchange U.S. property for other U.S. property and defer that tax. The challenge is FIRPTA withholding.
- Withholding. Under IRC §1445, the buyer generally must withhold 15% of the amount realized when buying U.S. real property from a foreign person. On a $2,000,000 sale, that's $300,000 that the QI would not receive.
- Withholding certificate. A foreign seller doing an exchange can apply to the IRS on Form 8288-B for a certificate reducing or eliminating withholding because the gain is deferred. Apply before closing.
- If the application is pending at closing, the amount is generally still withheld, but the settlement agent holds it until the IRS acts instead of sending it in. Plan for that money not being available for the replacement purchase in the meantime.
- Reporting. The foreign seller needs a U.S. taxpayer identification number and must file a U.S. return reporting the exchange on Form 8824.
Read foreigners selling U.S. property and FIRPTA and withholding requirements in exchanges. Some states also require withholding from nonresident sellers.
Example: a foreign investor exchanges a U.S. building
| Item | Amount |
|---|---|
| Sale price of a Miami condo building owned by a Canadian investor | $2,000,000 |
| FIRPTA withholding without a certificate (15%) | $300,000 |
| Gain | $900,000 |
| Withholding certificate requested before closing | Yes, based on the planned exchange |
| Replacement: a Texas industrial building | $2,100,000 |
| Result if the certificate is granted | Withholding released for the exchange; gain deferred |
Without the certificate, the investor would have had to replace the $300,000 with other money to buy the replacement, or accept boot. Canadian or other home-country tax rules are separate and should be checked with an advisor in that country. See Florida and Texas exchange notes.
Other cross-border questions
| Question | Short answer |
|---|---|
| Can a U.S. LLC owned by a foreigner do an exchange? | Yes. The tax owner of the LLC is the taxpayer; FIRPTA applies if that owner is foreign |
| Can I sell U.S. property and buy a foreign one with tax deferred? | Not under 1031. See alternatives to a 1031 exchange |
| Can I exchange into a DST if I'm a foreign investor? | Generally yes, as it is U.S. real estate; check the sponsor's rules for foreign investors |
| Do the 45 and 180 days change for foreign property? | No |
Cross-border deals take more planning time. Book an intro call before you list the property.
Frequently asked questions
Can I do a 1031 exchange with foreign property?
Yes, if both properties are outside the U.S. You can't exchange U.S. property for foreign property or foreign property for U.S. property.
Can a foreign investor do a 1031 exchange in the U.S.?
Yes. A foreign investor can exchange U.S. real estate for other U.S. real estate. FIRPTA withholding applies unless the IRS grants a withholding certificate.
How much is FIRPTA withholding?
Generally 15% of the amount realized on the sale, withheld by the buyer.
How do I reduce FIRPTA withholding in a 1031 exchange?
Apply to the IRS for a withholding certificate on Form 8288-B before closing, based on the planned exchange.
Will the foreign country respect my 1031 exchange?
Not necessarily. Section 1031 is a U.S. rule, and the country where the property sits may tax the gain under its own law.
Sources
- 26 U.S.C. §1031 (U.S. and foreign real property not like-kind, §1031(h))
- 26 U.S.C. §897 (U.S. tax on foreign persons' real property gains)
- 26 U.S.C. §1445 (FIRPTA withholding)
- Instructions for Form 8824 (reporting the exchange)
This article is general information, not tax or legal advice. Talk to your CPA or tax attorney about your situation.
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