Exchanges of Foreign Property

Exchangers may exchange properties throughout the United States. When taxpayers relocate within the United States they can essentially “take” their investment properties with them by completing an exchange. For example, the Exchanger who is moving from California to Montana may relinquish in California and acquire near their new home in Montana.

Prior to 1989, however, Exchangers were able to perform an exchange of a United States property for a foreign investment property, such as a rental house in Los Angeles for a rental villa in France. After the Revenue Reconciliation Act of 1989, IRC §1031 was amended such that real property located in the United States and real property located outside the United States are not like-kind. Treas. Reg. §1.1031(h). It is somewhat unclear by what “property located in the United States” means, but there is some indication that property located in the Virgin Islands may qualify as “property located within the United States” for purposes of favorable exchange treatment. Private Letter Ruling 9038030 (June 25, 1990). Moreover, a taxpayer who sells foreign property and buys foreign property, and who is subject to capital gains tax on their U.S. tax return, may want to consider an exchange since foreign property is considered to be of like-kind to other foreign property. For example, the taxpayer who relinquishes a rental property in Canada and acquires another like kind property in Canada, or relinquishes a rental apartment in Singapore and acquires a rental condominium in Hong Kong, may benefit from a tax deferred exchange. It is important to note that in exchanges involving personal property the determining factor as to whether the personal property is foreign or domestic is the location of the predominant use of the property because personal property used predominantly within the United States and personal property used redominantly outside the United States are not of a like kind. The code generally requires a two year holding period for both the relinquished and replacement properties in determining the predominant use “like kind” requirement for the exchange.