QOTW: Does foreign real property qualify for a like-kind exchange?
Question of the Week: Does U.S. property exchanged with foreign property qualify for like-kind exchange treatment?
Q. Does foreign real property qualify for a like-kind exchange?
A client lives part of the year in the U.S. and part of the year in her retirement condo in Panama, where she expects to settle permanently in a few years. She owns several residential rental properties in the States and hopes to eventually sell them and purchase rental properties in Panama. We know that the TCJA no longer permits like-kind exchanges of machines, vehicles, etc. but still allows exchanges of real property. Will my client be able to do a like-kind exchange of her U.S. rental properties for residential rentals in Panama? Does it matter if the rentals are somewhat different, such as a single-family house exchanged for an apartment-style condo?
A. Foreign property is not qualified for like-kind exchange treatment.
Your client will not be able to have a tax-deferred “like-kind” exchange of her U.S. rental properties with rental properties in Panama. Under a special rule of §1031(h), real properties located in and outside of the U.S. are not property of a like-kind.
Taxpayers ordinarily have many options for exchanges of §1250 real property. For instance, your client could apply like-kind exchange treatment to the exchange of her single-family residential rental units with apartment buildings, commercial property, and even unimproved land – as long as the relinquished and acquired properties were in the U.S. The TCJA did not modify the provision disallowing §1031 treatment for U.S. and foreign properties.
If your client decides to “exchange” a U.S. and Panamanian property, perhaps through a broker, she will have to recognize gain or loss on the transaction. Generally, gain or loss will be the difference between the fair market value of the U.S. property and her adjusted basis in it, as if she had sold the property outright.
Originally published in the 01/08/20 edition of TAX in the News