The like-kind rule for foreign property
Under IRC § 1031(h), U.S. real property and foreign real property are explicitly not like-kind to each other. This means you cannot exchange a U.S. rental for property located outside the United States and defer the gain. The gain on the U.S. property becomes taxable in the year of the sale regardless of what you buy abroad.
Conversely, you can exchange foreign property for other foreign property: a rental in Spain exchanged for an apartment building in Portugal would qualify as like-kind, subject to U.S. and applicable foreign tax rules.
What counts as \"real property\"
The IRS follows each country's local law to determine whether an interest in foreign real estate constitutes real property. Ownership structures common in some countries — such as fractional ownership of a resort unit or certain usufruct interests — may or may not qualify as real property for this purpose. The analysis is fact-specific and requires legal advice for cross-border structures.
Alternatives for foreign real estate
If you want to sell a U.S. property and invest abroad, the gain is taxable and must be reported. Options to manage the tax hit include: (1) harvesting capital losses elsewhere to offset the gain; (2) using the installment sale method if a buyer will pay over time; (3) using a Qualified Opportunity Zone fund to defer and partially exclude the gain; or (4) simply paying the tax and investing freely in any market.
Frequently asked questions
Can I 1031 exchange a U.S. rental into a Canadian rental?
No. Under IRC 1031(h), U.S. real property and foreign real property are not like-kind. A gain on the U.S. property is taxable.
Is a foreign-for-foreign exchange possible for U.S. taxpayers?
Yes. A U.S. taxpayer can exchange one foreign property for another foreign property in a like-kind exchange. Local country taxes may also apply.
Does FIRPTA apply when a foreign person sells U.S. real estate?
FIRPTA (Foreign Investment in Real Property Tax Act) requires withholding when a foreign person sells U.S. real property. If a U.S. person sells to a foreign buyer, the buyer must withhold a percentage of the amount realized unless an exemption applies.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.