Don’t Be Afraid of Foreign Investors, or Investing Overseas

Monday, October 31, 2016 by David Gorenberg

Don’t Be Afraid of Foreign Investors, or Investing Overseas

With the world economy in flux, a couple of interesting trends have presented themselves in the world of 1031 exchanges. First, US citizens are investing in foreign property. Second, foreigners are investing in US property. Each of these scenarios presents its own unique challenges for 1031 exchanges.

In the first scenario, Sarah is an American citizen who owns investment property in London. She has received a compelling offer, and will selling the building for €1,000,000 (or about $1.1M) and wants to understand whether she can do an exchange, and how to structure it. Conveniently for Sarah, she can indeed structure her transaction as a 1031 exchange. In addition to all of the other 1031 exchange rules, Sarah has one additional rule to keep in mind: foreign property is like-kind to other foreign property, but is not like-kind to US property. Thus, Sarah can acquire her replacement property in any country EXCEPT for the United States. Whether Sarah acquires replacement property in the UK, elsewhere in Europe, Israel, Belize or elsewhere is entirely up to her.

In the second scenario, Rachel is an Israeli citizen who owns an investment property in New York. She has received an attractive offer and is selling the building for $1,000,000 and wants to know whether she can benefit from Section 1031 as well. Much like Sarah’s situation, Rachel will need to comply with all of the 1031 exchange rules, plus one additional rule: the Foreign Investment in Real Property Tax Act (“FIRPTA”) requires a withholding of 15% of the proceeds from the sale of Rachel’s existing investment property. This withholding may be avoided if Rachel is going to be completing a 1031 exchange. For example, if Rachel will be acquiring replacement property worth only $800,000, the 15% withholding will kick in and the QI will need to withhold $150,000 from the proceeds it is holding on her behalf. Thus, Rachel needs to be particularly careful to ensure that she acquires replacement property of equal or greater value than he relinquished property in order to avoid the 15% FIRPTA withholding.

As with any legal matter, advance planning is the key to success. Our team of 1031 exchange accountants, attorneys and Certified Exchange Specialists®, working with our clients and their legal counsel, have successfully guided our clients through 1031 exchanges involving these issues on many occasions.

Got questions about "1031 Partner Exchanges" or other 1031 topics? Click here to ask an expert and get the answers you need.

The materials on this website are provided for informational purposes only and do not constitute legal advice. These materials are intended, but not promised or guaranteed to be current, complete, or up-to-date and should in no way be taken as an indication of future results. Transmission of the information is not intended to create, and the receipt does not constitute, an attorney-client relationship between sender and receiver. The newsletters and articles on this website are offered only for general informational and educational purposes. They are not offered as and do not constitute legal advice or legal opinions. You should not act or rely on any information contained in this website without first seeking the advice of an attorney.