The short answer
Yes. Section 1031 applies to corporations, and the FIRPTA rules let a foreign corporation use it when it exchanges a US real property interest for another US real property interest that would be taxed on a later sale, provided it files the statement the regulations require. Without an exchange the gain is taxed as effectively connected income, and a 30% branch profits tax can apply on top when the after-tax earnings are not kept invested in the United States. The buyer still withholds 15% unless a Form 8288-B is filed by closing. For an LLC, the first question is who the taxpayer is, because classification decides whether the LLC or its owner makes the exchange.
At a glance
| Allowed | Yes, US real property exchanged for US real property |
|---|---|
| Condition | Replacement must be taxable on a later sale and a statement filed with the return |
| Gain if sold | Effectively connected income of the foreign corporation |
| Second layer | 30% branch profits tax on the dividend equivalent amount |
| Deferred gain | Does not increase earnings and profits until recognized |
| Withholding | 15% of the price unless a certificate application is in by closing |
| US LLC, one foreign owner | Disregarded for income tax; the owner is the exchanger |
A foreign corporation can exchange as long as US property goes out and US property comes in
Section 897(e)(1) applies a nonrecognition provision to a foreign person's disposal of US real property "only in the case of an exchange of a United States real property interest for an interest the sale of which would be subject to taxation." Reg. section 1.897-6T(a) lists section 1031 among those provisions.
US real property held directly is always taxable on a later sale by a foreign owner, so a rental-for-rental exchange passes. The regulation adds a filing condition: under Reg. section 1.897-5T(d)(1)(iii) the corporation files a return, here Form 1120-F, with a statement describing both properties and their basis, any tax withheld, and a declaration that any later disposition will be treated as taxable whatever a treaty says.
Selling instead of exchanging can mean corporate tax and then a 30% branch tax
Section 897(a)(1)(B) taxes a foreign corporation's gain on US real property under section 882(a)(1) "as if such gain or loss were effectively connected" with a US business. That is the first layer.
Section 884(a) imposes "a tax equal to 30 percent of the dividend equivalent amount," which starts from effectively connected earnings and profits and is reduced when the corporation's US net equity grows. Proceeds kept invested in US assets reduce the base; proceeds taken home increase it.
An exchange removes the gain from both layers for now. Section 312(f)(1) increases earnings and profits only "to the extent to which such a realized gain or loss was recognized," so a fully deferred exchange adds nothing to the earnings that feed the branch profits tax.
For an LLC, classification decides who the exchanger is
A foreign LLC with no election is classified under Reg. section 301.7701-3(b)(2): a partnership if it has two or more members and at least one lacks limited liability, a corporation (an association) if all members have limited liability, and disregarded if it has one owner without limited liability. Most foreign companies whose members all have limited liability are therefore corporations.
A US LLC with a single foreign owner is disregarded for income tax, so the owner is the seller and the buyer of the replacement, and the same person must be on both sides. Reg. section 301.7701-2(c)(2)(vi) still treats that LLC as a corporation for section 6038A reporting. A US LLC taxed as a partnership is a US person that can exchange at the entity level, and the IRS FIRPTA page says the entity is itself the withholding agent for its foreign partners.
Blocker corporations and the section 897(i) election change who withholds
A domestic corporation is a United States person under section 7701(a)(30), so its sale of a rental is not subject to section 1445(a) withholding, and the corporation can exchange like any US company. The foreign shareholder's exposure moves to the stock, which section 897(c)(1)(A)(ii) treats as a US real property interest while the company is a real property holding corporation.
Section 897(i) lets a foreign corporation entitled to nondiscriminatory treatment under a treaty elect to be treated as domestic for sections 897 and 1445; the election can be revoked only with IRS consent. Both structures are entity-planning decisions that belong with cross-border counsel before a sale, not during one.
Hypothetical: a $3,000,000 building held by a foreign company
A foreign corporation sells a US apartment building for $3,000,000 with a $1,000,000 adjusted basis. The figures are hypothetical; run your own with a CPA who prepares Form 1120-F.
- Straight sale: $2,000,000 of effectively connected gain is taxed at corporate rates, and if the after-tax proceeds leave the United States, the branch profits tax applies to the dividend equivalent amount.
- Exchange into $3,000,000 of US replacement property: no gain recognized, no addition to earnings and profits, and the statement goes with the return.
- At closing the buyer withholds $450,000 and holds it if Form 8288-B, showing the corporation's EIN, was filed by the transfer date; see FIRPTA in a 1031 and how long the certificate takes.
A DST can be the replacement if the sponsor accepts a foreign entity
Under Rev. Rul. 2004-86 a DST beneficial interest is treated as an undivided interest in the trust's real estate, so it is US real property for the section 897(e) test. Sponsors decide whether to admit foreign entities, and rent paid into the trust is subject to withholding for foreign owners, as set out on foreign investors and DSTs. The same-taxpayer point is on can an LLC do a 1031.
Related questions
Can the foreign corporation exchange into property outside the United States?
No. Section 1031(h) makes US and foreign real property not like-kind, and section 897(e) separately requires the replacement to be taxable on a later sale.
Does a treaty exempt the gain anyway?
Generally no for US real property. The section 1.897-5T statement requires the company to declare that later dispositions will be taxed notwithstanding any treaty.
If the shareholders sell the foreign company's stock instead, is there FIRPTA withholding?
The IRS says generally not, because stock of a foreign corporation is not a US real property interest unless the company has made the section 897(i) election. The buyer then inherits the building's low basis, which affects price.
Who signs the exchange documents for a foreign corporation?
An authorized officer, the same way it signs the sale contract. Form 8288-B must be signed by a responsible corporate officer or an agent holding a power of attorney.
We are two foreign owners in a US LLC taxed as a partnership. Who exchanges?
The LLC, as a US partnership, unless you restructure first. One member cannot exchange alone while the other cashes out without planning; see when one partner wants cash.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- 26 U.S.C. section 897(a), (c), (e) and (i)
- Treas. Reg. section 1.897-6T, nonrecognition exchanges
- Treas. Reg. section 1.897-5T(d)(1)(iii), filing requirements
- 26 U.S.C. section 884, branch profits tax
- 26 U.S.C. section 312(f)(1), effect of gain on earnings and profits
- 26 U.S.C. section 1445, FIRPTA withholding
- Treas. Reg. section 301.7701-3(b)(2), default classification of foreign entities
- Treas. Reg. section 301.7701-2(c)(2)(vi), foreign-owned disregarded entities
- IRS, FIRPTA withholding (including question 18)
- IRS, Form 8288-B and instructions (Rev. December 2025)