Can foreigners use the 1031 exchange?

Question

Hi all! I'm new to Bigger Pockets and have been reading a lot about real estate investing. I've read all the articles I can about 1031 exchanges but nowhere could I find anything on foreigners (non-US persons, non-US citizens, non-US residents, etc.) using a 1031 exchange! We currently own some property in California and have been thinking about selling and using the 1031 exchange for something bigger and perhaps a multi-unit. I would love to seek the guidance of some of the more experienced fellow investors and/or a professional on whether we can take advantage of this rule? My wife and I are both non-residents of the US and are non-US citizens/persons. Thanks in advance for any advice or feedback!

-Mike

Dave Foster · Answer

@Michael Tung, Yes, Foreign investors can take advantage of 1031 exchanges.  It's even more important for you because completion of a 1031 exchange allows you to be exempt from the 15% FIRPTA withholding requirement.

They're not easy to complete for a foreign investor due to some added requirements.  In order to be eligible to do a 1031 and exempt from FIRPTA withholding the investor must either obtain a withholding certificate certifying the non-recognition of gain from the 1031 in advance from the IRS.   This can take several months.  Or the investor must complete a simultaneous exchange where the sale and purchase are completed at the same time.

For this reason investors will many times choose one of a couple paths.

1. If the gain is enough they will choose to forgo the certificate and accept the withholding while still completing a 1031 to defer any remaining tax.

2. They will use a simultaneous exchange to go into a fractional passive property investment that are more readily available and and be scheduled more easily for a simultaneous type situation.