In a 1031 exchange, foreign real and personal property, when exchanged for foreign real and personal property, qualify for a federal capital gain tax deferral. Real property can be any real property given the nature and character of rights of the exchange properties are essentially alike including likeness of physical properties, character of title conveyed, rights of the parties and duration of interests. Personal property must be exchanged for like-kind or like-class property, such as aircraft for aircraft, gold bullion for gold bullion or oil painting for oil painting. Predominance of use over the prior two years determines the property’s location.
India Real Property for India Real Property
What are the steps of a foreign exchange? The answer is it depends upon whether the exchange funds are held in the country where the relinquished property is sold or in the US. If held in the US, the issue becomes the exchange rate loss when converting to the US Dollar and back to the country where the replacement property is acquired.
The second set of issues impacting the 1031 exchange is the socially accepted norms when buying and selling property. In India, the Buyer will want to pay the Seller directly. There is no closing or escrow company orchestrating the transaction. If the Buyer were to receive the funds from the Seller, then the g(6) constructive receipt regulation of the 1031 code would be violated and the exchange fails. Atlas 1031 accommodates the ability for the Seller’s exchange funds to be held in Indian Rupees in an Indian bank under the taxpayer’s permanent identification number or PAN requiring two signatures for disbursement, one from the taxpayer and one from the Bank Advocate. The Bank Advocate cannot be a related party or disqualified person. Prior to disbursing, the disbursement request is initiated and signed by Atlas 1031 Exchange and the taxpayer. The disbursement request is then emailed to the Bank Advocate who interacts with the Bank to access the funds for payment to the Seller.
Plenty of time is required to understand and work through issues. For example, in India, understanding how to accommodate in-country exchanges has taken two years and discussion with chartered accountants and bank officers. This has resulted in a number of successful exchanges in India, Australia, New Zealand and Israel.
Foreign 1031 Exchange Rules
The 1031 exchange rules for property held internationally are the same as for property located predominantly in the United States. Foreign property is not considered like kind with property held in the US or vice versa. A brief review of the primary exchange rules follows.
Exchange value – to defer the entire gain, the net replacement property purchase price must be equal to or greater than the net relinquished property selling price. Partial exchanges are acceptable.
Timeline – the exchange must be completed within 180 calendar days of the initial closing. The replacement property must be identified, preferably to the Qualified Intermediary, no later than 11:59 PM on the 45th calendar day post-closing.
Same taxpayer – the taxpayer who sells must be the taxpayer who buys with the exception of a disregarded entity such as a single member limited liability company.
Related party – the relinquished property can be exchanged with a related party given the property is not sold within two years of the transaction; otherwise, the sale triggers the deferred gain. The replacement property can be acquired from a related party if the related party is also initiating a 1031 exchange.
If you are considering a 1031 exchange of foreign based real or personal property, Atlas 1031 provides the accommodation services compliant with Internal Revenue Code Section 1031. Click on the button below to either ask a question or call our office to discuss your foreign 1031 exchange.
