Exchanges of Foreign Property
Exchangers may exchange properties throughout the United States. When taxpayers relocate within the United States they can essentially “take” their investment properties with them by completing an exchange. For example, the Exchanger who is moving from California to Montana may relinquish in California and acquire near their new home in Montana. Prior to 1989, however, Exchangers were able to perform an exchange of a United States property for a foreign investment property, such as a rental house in Los Angeles for a rental villa in France. After the Revenue Reconciliation Act of 1989, IRC §1031 was amended such that real property located in the United States and real property located outside the United States are not like- kind. See Treas. Reg. §1.1031(h). Prior to April 2005, it was unclear by what “property located in the United States” meant, but there was some indication in Private Letter Ruling 9038030 (June 1990) that property located in the United States Virgin Islands might qualify as “property located within the United States” and therefore like-kind to property located in one of the 50 states. In April 2005 the IRS issued final and temporary regulations regarding various aspects of residence and source rules involving U.S. Possessions, which include American Samoa, Guam, the Northern Mariana Islands, Puerto Rico and the United States Virgin Islands. See 2005 TNT 66-7. Unfortunately, pursuant to §932 and §935 of these temporary regulations, at this time only property located within the United States Virgin Islands, the Northern Mariana Islands and Guam is like-kind with property located within the United States for purposes of qualifying for a tax deferred exchange.

Taxpayers who sell foreign property and buy foreign property, and who are subject to capital gains tax on their U.S. tax return, may want to consider an exchange since foreign property is considered to be of like-kind to other foreign property. For example, the taxpayer who relinquishes a rental property in Canada and acquires another like-kind property in Canada, or relinquishes a rental apartment in Singapore and acquires a rental condominium in Hong Kong, may benefit from a tax deferred exchange. It is important to note that in exchanges involving personal property the determining factor as to whether the personal property is foreign or domestic is the location of the predominant use of the property because personal property used predominantly within the United States and personal property used predominantly outside the United States are not of a like-kind. The tax code generally requires a two year holding period for both the relinquished and replacement properties in determining the predominant use for the “like-kind” requirement for personal property exchanges.