Tax Deferred Exchange of Foreign Properties for Other Foreign Properties

This is an income tax planning strategy for the sale of foreign property owned by U.S. Taxpayers that will surprise even the most sophisticated and advanced income tax advisors.  The sale or disposition of foreign real estate or other assets owned by a United State Taxpayer may still create a United States income tax consequence, including capital gain taxes and/or depreciation recapture taxes.

The United States income tax consequences can be deferred by the Taxpayer by using a 1031 Tax Deferred Exchange strategy as long as the foreign real estate sold and subsequently purchased meet the following requirements:

• Taxpayer does in fact have a U.S. taxable gain and related tax consequence
• Relinquished and replacement properties must meet the "Qualified Use" standard (i.e. be held for rental, investment or use in a business).
• Relinquished and replacement properties are all foreign properties in order to satisfy the like-kind property requirement (i.e. can not exchange into or out of U.S. properties; must all be non-domestic properties)

Recent Foreign Property Exchanges

The following foreign property 1031 Exchange transactions were structured and completed during the last few months and will give you an idea of what can be accomplished:

• Sale of a London Flat 1031 exchanged for another London Flat that were both held, used and reported as rental property
• Sale of Australian water rights that were defined under local Australian law to be an interest in real estate were 1031 exchanged for Canadian office property
• Sale of Australian commercial property was 1031 exchanged into Canadian residential investment property

Caution - Foreign Currency Exchange Issues

There can be complications with a foreign property 1031 exchange.  The complication involves foreign currency exchange conversion issues, especially under the current economic climate.  The volatile foreign currency futures can pose a significant risk to those who are exchanging properties, especially when the relinquished and replacement properties are located in different foreign countries. 

Taxpayers may wish to consider asking their Qualified Intermediary to receive, hold, and ultimately disburse their 1031 Exchange proceeds in the applicable foreign currency rather than converting the foreign currency into U.S. dollars and risk a major shift in the foreign currency exchange rate.   However, you should also expect a much higher fee from the Qualified Intermediary.