Can a nonresident alien do a 1031 exchange on US rental property?

Section 1031 is open to any taxpayer, and section 897 sets the terms for a foreign one

Section 1031 defers gain on an exchange of real property held for investment or business use for like-kind real property. It never mentions citizenship or residence. The only geographic rule is section 1031(h): real property in the United States and real property outside it are not like-kind, so a nonresident who sells a Phoenix rental can buy in Dallas or a DST holding Florida industrial property, but not an apartment in Vancouver or Munich.

For a foreign person the exchange also has to clear section 897(e)(1), which allows a nonrecognition provision to apply to a disposition of a US real property interest only in an exchange for an interest whose sale would itself be subject to US tax. Reg. section 1.897-6T(a) lists section 1031 among the provisions it covers and restates the test: the property received must be a US real property interest that, immediately after the exchange, would be taxed in the United States when disposed of.

US real property held directly always passes that test, and so does a DST interest, because Rev. Rul. 2004-86 treats the owner of a beneficial interest as owning an undivided fractional interest in the trust's real estate. The regulation's final condition is procedural: the transferor must comply with the filing requirements of Reg. section 1.897-5T.

The statement filed with Form 1040-NR is what keeps the deferral in place

Reg. section 1.897-5T(d)(1)(iii) requires a nonresident alien or foreign corporation that transfers a US real property interest in a nonrecognition exchange to file an income tax return for the year of the transfer and attach a statement. The statement says that section 897 applies, describes the property given up with its location, adjusted basis and transfer date, describes the US real property interest received, reports any gain recognized and any tax withheld, and identifies any treaty under which the owner would claim exemption.

The last item is the one with teeth: a declaration, signed by the transferor or an authorized representative, that any later sale, exchange or other disposition of the replacement will be treated as taxable, notwithstanding any US income tax treaty or change in circumstances. In practice that means the exchange locks the replacement into the US tax net for as long as you own it.

The return is Form 1040-NR for an individual, with Form 8824 reporting the exchange. The 1040-NR instructions add a helpful point: gain or loss on a US real property interest is automatically treated as effectively connected income, so no election is needed to report the sale on the business-income side of the return.

If you sell instead, the gain is taxed at graduated rates and the 3.8% surtax never applies

Section 897(a)(1) treats a nonresident alien's gain on US real property as if it were effectively connected with a US trade or business, and section 871(b) taxes effectively connected income under the ordinary rate tables in section 1. A long-term gain therefore uses the capital gain brackets rather than the flat 30% that applies to passive income.

For 2026, Rev. Proc. 2025-32 puts the 15% band for a single filer at taxable income up to $545,500, with 20% above that, and the 25% ceiling on unrecaptured section 1250 gain applies to the depreciation you claimed on the building. The one break a nonresident gets over a resident is in section 1411(e)(1): the 3.8% net investment income tax does not apply to a nonresident alien, so there is no surtax on the gain or on any boot.

The buyer still withholds 15% of the full price at closing and the seller recovers any excess through the return, which is a cash-flow problem rather than a tax problem. The routes for that money are on getting FIRPTA withholding refunded.

While you hold the replacement, rent is taxed on gross unless you elect net-basis treatment

Section 871(a)(1) imposes a 30% tax on fixed or determinable annual or periodical income from US sources, and rent is on that list. Without an election the tenant, property manager or DST trustee withholds 30% of gross rent with no deduction for depreciation, interest, taxes or repairs.

Section 871(d) lets a nonresident elect to treat income from US real property held for the production of income as effectively connected. Reg. section 1.871-10(b)(1) says the election covers all income from US real property, not one class of it, and section 1.871-10(d) explains that it is made by a statement attached to the return and, once the initial period passes, can be revoked only with the Commissioner's consent. Most owners of rentals or DST interests make it, because net-basis taxation at graduated rates almost always beats 30% of gross.

Hypothetical: a $900,000 sale with a $400,000 gain, exchanged or sold

A nonresident sells a rental for $900,000 with a $500,000 adjusted basis, of which $120,000 is depreciation claimed since purchase. Every figure here is hypothetical and rounded; have a preparer who files Form 1040-NR model your own facts.

If the owner exchanges into $900,000 of US replacement property, no gain is recognized, the $500,000 basis carries over under section 1031(d), the return carries the section 897 statement, and the only cost is the withholding that sits with the buyer until a certificate issues. If the owner sells, the $120,000 of unrecaptured section 1250 gain is capped at 25%, the remaining $280,000 of long-term gain falls in the 15% band for a single filer with no other US income, and no net investment income tax is added. The exchange defers the whole amount; the sale pays it now at nonresident rates that are the same as a citizen's.

What to settle before you list, and where a DST fits

Three things decide whether the deferral is worth it for a foreign owner. First, your home country may tax the gain in the year of sale whether or not the United States does, which is the Canadian problem described on whether a 1031 works for a Canadian owner. Second, the withholding has to be managed by a Form 8288-B filed by closing, and that needs a taxpayer identification number, covered on whether you need an ITIN. Third, the replacement has to be something you can own from abroad.

A beneficial interest in a Delaware statutory trust is US real property for the section 897 test and needs no management, which is why foreign exchangers often use a traditional DST. It is illiquid, its distributions are not guaranteed, and you can lose principal; the trust also becomes your withholding agent for rent and for 21% of your share of gain when it sells, as set out on DSTs for foreign investors. Entity owners have their own rules on foreign corporations and LLCs.