Most real estate investors know the benefits derived from making 1031 exchanges compared to a property’s outright sale. Some of these advantages are a prorogue in your capital gains taxes, a guarantee that your money is working for you, and the fact that you can make the most out of your returns and equity. The best thing about 1031 exchanges is that it serves both the investor and the U.S. economy as it allows the former to make the best investment for their capital.

Since 1031 exchanges help advance the economy, would it be possible to exchange for a property situated in a foreign nation? The answer is no, it cannot be done. Although you are temporarily free from capital gains taxes, the money you saved in having a 1031 exchange falls under tax deferment and this presupposes that the government can collect the money from you anytime you want to sell your property.

It is difficult and sometimes impossible for the IRS to collect taxes on the sale of foreign property.

The United States limits 1031 exchanges within its geographical area to allow IRS easily collect capital gains taxes in the future. You may want to know the rules that apply to U.S. territories like Guam, U.S. Virgin Islands, and Puerto Rico.

The IRS has declared in private letter rulings that a property within Virgin Islands can only meet like-kind requirements with a U.S. property if it can produce income. This is more constrictive since a normal requirement for a like-kind exchange only necessitates a property to be held for trade, business, or investment.

So if you are considering making an exchange outside of the fifty states (and Washington D.C.), make certain that your replacement property will, in fact, be considered to be like-kind to the property that you are selling. In order to be absolutely sure, you may even want to request a private letter ruling on your particular case.