Are International Investors Eligible for 1031 Exchange?

3 Replies

@Nolan C. , Yes and it's complicated :). The complication is that foreign investors are subject to FIRPTA withholding or 15% of the sales price of the property they are selling.  This is not a tax but a withholding.  But a 1031 when completed appropriately by a foreign investor not only defers all of the tax on gain but it also negates the firpta withholding since the gain is not recognized.

But as you can imagine the IRS it not excited about letting non-us citizens (or citizens as well come to think about it) walk around with access to money that may be the IRS's by virtue of taxation.  So they have added some extra hoops to 1031s by foreign investors.

In order to complete a 1031 and avoid all tax and firpta withholding the foreign investor must

1. Obtain a certificate on non-withholding (a 3-4 month application process to the IRS so pretty much a non-starter)

or

2. Complete a simultaneous 1031 exchange. This is a 1031 where the sell and buy are both set up and close with the funds from the sale going directly to the purchase as directed by the QI and closings happening within a day or two of each other.

Two other considerations

1. The foreign investor does not have the option of doing a partial exchange and purchasing less than they sold or taking any cash.  IF they do then the full amount of firpta must be withheld.

2. The replacement property must be within the 50 US states.

Yes and it's complicated.  But what an opportunity for foreign investors to keep a huge chunk of money working for them. 

@Nolan C.

One other thing to consider is if the non-resident /non-citizen lives in a country where he/she must report the sale of the property and the country doesn't accept/recognize the 1031 tax laws in the united states.