Can I 1031 exchange foreign property, or exchange into Puerto Rico, Guam or the USVI?

Section 1031(h) is a single sentence, and it settles the mainland-to-abroad question

Congress added the rule in 1989 and has never softened it. The whole of subsection (h) reads: "Real property located in the United States and real property located outside the United States are not property of a like kind." There is no threshold, no election and no exception inside the statute.

So a Denver duplex cannot become a villa in Portugal, however carefully the paperwork is drawn. The intermediary, the day-45 list and the day-180 close are all beside the point once the replacement sits on foreign soil.

The bar runs both ways. Selling a Tuscan farmhouse and buying an Arizona strip center fails for the same reason, which surprises US citizens who assume the direction of travel matters.

The possessions are a separate question because "United States" means the States and DC

Section 7701(a)(9) defines the term for the whole Code: "The term 'United States' when used in a geographical sense includes only the States and the District of Columbia." Every US possession therefore starts on the wrong side of section 1031(h).

That is the default for Puerto Rico, Guam, the US Virgin Islands, the Northern Mariana Islands and American Samoa alike. Anything that puts a possession back inside has to come from outside section 1031 itself.

For three of those five, it does, and the authority is a worked example written into the coordination regulations rather than anything in the exchange rules.

Two regulations name section 1031 by number and restore the USVI, Guam and the Northern Marianas

Treas. Reg. §1.932-1(g)(1)(ii)(E) is explicit for the Virgin Islands: if an individual to whom section 932(a) applies "exchanges real property located in the United States for real property located in the Virgin Islands, notwithstanding the provisions of section 1031(h), such exchange may qualify as a like-kind exchange under section 1031."

Treas. Reg. §1.935-1(c)(1)(ii)(E) says the same for a "section 935 possession", which that regulation defines as Guam or the Northern Mariana Islands. Both rules are mirrored for residents of the possession, so a bona fide Virgin Islands resident can exchange into mainland property under §1.932-1(g)(2)(ii)(E).

The condition is who you are for the year. Section 932(a) reaches a US citizen or resident with Virgin Islands source income who must file with both jurisdictions, and §1.935-1(a)(2)(iii) reaches a US citizen or resident alien with income sourced in Guam or the Northern Marianas. The replacement property's own rent is usually what puts you inside those rules, so ask your attorney to read the regulation against your filing position before you identify.

• Inside for section 1031 with the right filing position: US Virgin Islands, Guam, Northern Mariana Islands.
• Outside, with no equivalent regulation: Puerto Rico, American Samoa.

Guam's rule only survives because the 1986 repeal never took effect there

Section 935 was repealed by the Tax Reform Act of 1986, but the repeal was conditioned on the possession signing an implementing agreement with the United States. Treas. Reg. §1.935-1(a)(3)(i) defines a section 935 possession as Guam or the Northern Mariana Islands "unless such possession has entered into an implementing agreement ... with the United States that is in effect for the entire taxable year."

Neither has entered one. That is why Treasury issued the current regulations in 2008 in the present tense, and why the like-kind example inside them is still live.

It also frames how much weight the position carries. The example exists because Treasury wrote one, not because section 1031 contains a possessions rule, so the analysis belongs with counsel who will sign the return.

Puerto Rico is outside the United States here, which closes one door and opens a narrow one

Nothing in the regulations under section 933 or section 931 carries the like-kind example that the Virgin Islands and Guam regulations carry. Puerto Rico and American Samoa are simply "outside the United States" in section 1031(h) terms.

A mainland rental therefore cannot be exchanged for a San Juan condominium. Run the same logic forward, though, and a rental in Mexico or Spain can be exchanged for one in Puerto Rico, because neither side of that trade is in the United States.

That is a narrow planning point rather than a workaround, and it turns on Puerto Rico's own income and transfer taxes, which local counsel has to price before you rely on it.

Foreign for foreign defers the US tax; the local tax usually still lands this year

Subsection (h) separates US from non-US real property and does nothing else, so a rental in Spain exchanged for a rental in Portugal is like-kind for US purposes. Identification by day 45, closing by day 180 and the qualified intermediary all apply exactly as they would in Ohio.

The country where the property sits almost never mirrors section 1031. You can owe capital gains tax there in the year of sale while the US gain is deferred, which leaves you holding a foreign tax credit with no US tax to set it against.

Section 904(c) lets an unused credit go back one year and forward ten, so the mismatch is often a timing cost rather than a permanent one. Model it with your CPA before you commit, because the answer changes country by country.

If you are the foreign seller of US property, FIRPTA runs on its own timetable

A buyer acquiring a US real property interest from a foreign person generally withholds 15% of the amount realized under section 1445 and remits it with Forms 8288 and 8288-A. Starting an exchange does not switch that off.

Treas. Reg. §1.1445-2(d)(2)(iv) takes away the usual shortcut. The notice of nonrecognition is not available "to non-simultaneous like-kind exchanges under section 1031 where the transferee cannot determine that the exchange has been completed and all the conditions for nonrecognition have been satisfied" by the time the withholding falls due.

The only relief is a withholding certificate applied for on Form 8288-B and actually received. Put it on the pre-closing checklist rather than the post-closing one; DSTs and 1031 exchanges for foreign investors covers the rest of the exposure.