A 1031 exchange is a way to exchange property, such as real estate, for other properties. This can cause investors to save a lot of money on taxes. To do this, both properties need to be “like-kind”, meaning of the same type or use. Unfortunately, to be like-kind, properties in the 1031 exchange can’t be exchanged between the United States and other countries, meaning properties in the United States can only be exchanged for others in the United States or territories owned by the United States, while foreign properties can be exchanged for other foreign properties in any country. Property can be exchanged from one country to another, as long as it’s not in the United States.
Despite this, using a 1031 exchange in a foreign country can still be a good investment. In countries with no capital gains taxes, such as Belize or New Zealand, using a 1031 exchange would be a good investment because you can still defer United States capital gains taxes. However, in a country with as much in capital gain taxes as the United States, such as France or Denmark, one probably would not do a 1031 exchange. One can take a credit on one’s tax return for taxes paid in a foreign country and use it to offset taxes in the United States. If one does a 1031 exchange, then he or she will not be able to take this credit.
In summary, 1031 exchanges in foreign countries can only be used if all properties involved (the relinquished property and the replacement property) are outside of the United States and its territories, and they should only be done in countries with no capital gains taxes.