{"id":6134,"date":"2016-10-15T09:00:49","date_gmt":"2016-10-15T13:00:49","guid":{"rendered":"http:\/\/www.escapeartist.com\/?p=5735"},"modified":"2020-08-19T13:45:28","modified_gmt":"2020-08-19T17:45:28","slug":"1031-exchange-foreign-real-estate-tax-considerations","status":"publish","type":"post","link":"https:\/\/www.escapeartist.com\/blog\/1031-exchange-foreign-real-estate-tax-considerations\/","title":{"rendered":"1031 Exchange of Foreign Real Estate Tax Considerations"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">A 1031 exchange in the United States allows you to exchange one real estate property for another without paying tax on the gain. A 1031 exchange of foreign real estate allows you to exchange one foreign property for another with the same tax benefits. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Before I get into the details of a 1031 exchange of foreign real estate, I should point out that United States citizens pay U.S. tax on any gain from the sale of real estate. It doesn\u2019t matter that the property is located outside of the U.S. So long as you hold a blue passport, the IRS wants its share. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">A <\/span><a href=\"https:\/\/www.irs.gov\/uac\/like-kind-exchanges-under-irc-code-section-1031\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">1031 exchange<\/span><\/a><span style=\"font-weight: 400;\"> of foreign real estate applies to <\/span><b>business or <a title=\"international real estate investments\" href=\"http:\/\/www.escapeartist.com\/realestate\/international-property-investments-sale\/\" target=\"_blank\" rel=\"noopener noreferrer\">international real estate investments<\/a> property.<\/b><span style=\"font-weight: 400;\"> It\u2019s not meant to reduce taxes on your personal residence. Thanks to IRC Section 1031, a properly structured 1031 exchange of foreign real estate allows you to sell a <\/span><i><span style=\"font-weight: 400;\">foreign <\/span><\/i><span style=\"font-weight: 400;\">property and reinvest the proceeds in a new <\/span><i><span style=\"font-weight: 400;\">foreign <\/span><\/i><span style=\"font-weight: 400;\">property and to defer all capital gain taxes. IRC Section 1031(a)(1) states:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u201cNo gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A like-kind property is any property held for business or investment. You may exchange a U.S. business property for another U.S. business property or a foreign investment property for a foreign investment property. You may NOT exchange a foreign property for a U.S. property or a U.S. property for a foreign property. <\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Note that the two properties do not need to be in the same country. They simply need to be outside of the United States. <\/span><\/li>\n<\/ul>\n<p><b>Foreign Personal Residence: <\/b><span style=\"font-weight: 400;\">For your residence, you should do your best to live in the home at least 2 years before you sell it. The reason is that when you live in the home for 2 to 5 years, you will be eligible to exclude a gain of up to $250,000 (or $500,000 for those filing married jointly) from U.S. taxation. If not, the full gain will be taxed at the applicable capital gains rates.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The rest of this article will focus on foreign real estate held for business or investment purposes. I will also assume you will hold the property for more than 1 year and thus long term capital gains rates apply. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">There are two ways to avoid (or defer) this U.S. tax on foreign real estate used for business. <\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The <\/span><a href=\"https:\/\/www.irs.gov\/taxtopics\/tc856.html\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">U.S. Foreign Tax Credit<\/span><\/a><span style=\"font-weight: 400;\"> will ensure you are not double taxed on the sale of your foreign real estate.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Setting up a <\/span><a href=\"http:\/\/premieroffshore.com\/the-offshore-1031-exchange-pay-zero-us-tax-on-your-foreign-real-estate-sale\/\"><span style=\"font-weight: 400;\">1031 exchange of like-kind property<\/span><\/a><span style=\"font-weight: 400;\"> will allow you \u00a0to defer US tax on the sale of your foreign real estate. <\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">The U.S. Foreign Tax Credit gives you a dollar for dollar credit on foreign taxes you pay. Thus, if the <\/span><b>capital gains tax rate<\/b><span style=\"font-weight: 400;\"> of the country where your property is located is equal to or higher than the US rate, you should pay no U.S. tax when you sell your property. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">The long term rate in the United States is 20%. Additional taxes may apply depending on your income level. For example, Taxpayers earning income above certain thresholds ($200,000 for singles, $250,000 for married couples filing jointly) pay an additional 3.8% tax on all investment income. Therefore, the top federal tax rate on long-term capital gains is 23.8%.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The capital gains tax rate of the country where the property is located is about 23.8%, then you will pay little or no U.S. tax when you sell. You will still report the transaction on Schedule D of your personal return, but no tax will be due. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">In fact, if the tax rate of your country is anywhere near the U.S. rate, you probably don\u2019t want to bother with a 1031 exchange. If you pay 18% in tax to the United Kingdom, setting up a 1031 exchange of foreign real estate to save 2% to 5.8% is probably not worthwhile. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Countries with low capital gains rates, such as Panama, Colombia and and Nicaragua at 10% are the most common 1031 exchange participants. Belize, Belgium, Malaysia, and New Zealand, which have zero capital gains rates, are excellent 1031 options. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">Considering the time and cost associated with setting up a 1031 exchange, I suggest you should be looking to defer a U.S. taxable gain of $50,000 to $100,000 before structuring this type of transaction.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Also, remember that you\u2019re deferring tax, not eliminating it. If you plan to hold the new business or investment property for a short time, the benefits of a 1031 exchange of foreign real estate will be diminished. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">If a 1031 exchange will be tax efficient for you, check out my article <\/span><a href=\"http:\/\/premieroffshore.com\/the-offshore-1031-exchange-pay-zero-us-tax-on-your-foreign-real-estate-sale\/\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">The Offshore 1031 Exchange<\/span><\/a><span style=\"font-weight: 400;\">. Beginning on page 3, under The Offshore 1031 Exchange, you\u2019ll find the applicable rules and information on how to structure the transaction. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">I hope you\u2019ve found this article helpful. <\/span><span style=\"font-weight: 400;\">If you\u2019d like to be put in contact with a real estate professional who can assist you find a like-kind business or investment property, and who can structure your exchange, please <a title=\"contact us\" href=\"http:\/\/www.escapeartist.com\/realestate\/contact\/\" target=\"_blank\" rel=\"noopener noreferrer\">contact us<\/a>.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>A 1031 exchange in the United States allows you to exchange one real estate property for another without paying tax on the gain. A 1031 exchange of foreign real estate allows you to exchange one foreign property for another with the same tax benefits. Before I get into the details of a 1031 exchange of [&hellip;]<\/p>\n","protected":false},"author":686,"featured_media":5390,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","om_disable_all_campaigns":false,"footnotes":"","_jetpack_memberships_contains_paid_content":false},"categories":[2,9412],"tags":[],"yst_prominent_words":[15156,15155,15163,15165,2937,15158,15159,6866,15157,15154,2273,8762,2102,15164,15161,2100,1878,15160,2131,15162],"acf":[],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"https:\/\/www.escapeartist.com\/wp-content\/uploads\/2016\/08\/Nicaragua_House_For_sale_Pool.jpg","_links":{"self":[{"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/posts\/6134"}],"collection":[{"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/users\/686"}],"replies":[{"embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/comments?post=6134"}],"version-history":[{"count":4,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/posts\/6134\/revisions"}],"predecessor-version":[{"id":32953,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/posts\/6134\/revisions\/32953"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/media\/5390"}],"wp:attachment":[{"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/media?parent=6134"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/categories?post=6134"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/tags?post=6134"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.escapeartist.com\/wp-json\/wp\/v2\/yst_prominent_words?post=6134"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}