Section 1031(h) (US and Foreign Property Are Not Like-Kind)

The rule dates from 1989, and the 2017 Act left it as a statement about real property only.

Congress added subsections (f) through (h) to section 1031 in Public Law 101-239, effective for transfers after July 10, 1989. Today the subsection reads in full: "Real property located in the United States and real property located outside the United States are not property of a like kind."

A 1997 amendment widened subsection (h) to reach foreign personal property too. When Public Law 115-97 narrowed section 1031 to real property in 2017, it rewrote subsection (h) back to the single real-property sentence.

The geographic line comes from section 7701(a)(9): the United States, used in a geographical sense, includes only the states and the District of Columbia. IRS Publication 544 puts it plainly: foreign real property is real property not located in a state or the District of Columbia.

In a hypothetical trade, the location of the replacement settles the question before any deadline matters.

Hypothetically, you sell an Ohio rental with a $300,000 gain. If the replacement is a rental in Portugal, the whole gain is recognized: the trade fails the like-kind test, so a timely identification and closing cannot rescue it. If the replacement is a rental in Arizona, the ordinary exchange rules apply.

The bar runs both ways, and it does not block a trade of one foreign property for another. A rental in Spain exchanged for one in Portugal is like-kind for US purposes because neither side is in the United States, although the country where the property sits may tax the sale under its own law. Run your own facts with your CPA.

It bites at the possessions, where two regulations restore the Virgin Islands, Guam and the Northern Marianas.

Reg. section 1.932-1(g)(1)(ii)(E) says that if an individual to whom section 932(a) applies exchanges US real property for Virgin Islands real property, the exchange may qualify under section 1031 notwithstanding section 1031(h). The regulation covers a US citizen or resident, other than a bona fide Virgin Islands resident, who has income from Virgin Islands sources or effectively connected with a business there, and a mirrored rule covers bona fide residents.

Reg. section 1.935-1(c)(1)(ii)(E) gives the same treatment to a US taxpayer exchanging into a section 935 possession, defined as Guam or the Northern Mariana Islands unless the possession has an implementing agreement with the United States in effect for the whole year. Both regulations add that every other section 1031 requirement must still be met.

Puerto Rico and American Samoa have no matching rule, so mainland property cannot be exchanged into either. For the territories in more depth see 1031 exchanges with Puerto Rico, the USVI and Guam; foreign sellers of US property should also read about FIRPTA withholding at closing.