Foreign property is exciting to purchase, but can often be excruciating to sell. Depending on the country in which you’ve invested, you may be seeing a huge developmental gain or a staggering financial loss if the time has come to sell your foreign property.
While land and buildings in areas outside of the United States are subject to the laws of their native country, if you are a taxpayer in the US, then the sale of your foreign property will also accumulate hefty regulation and taxation on your income.
With this in mind, double taxation will quickly eat away at your chances of turning a profit on your international investment. To mitigate this, capital gains taxes are often deferred by way of a 1031 exchange, which requires former property owners to “trade” their sold property for a new, similar investment.
In this article, we will outline the steps necessary to 1031 exchange foreign property and eliminate capital gains taxes. With this, we will also showcase the strength of mineral rights and other profitable investments as the new properties chosen in a 1031 exchange of foreign property.
How to Sell Your Foreign Property
Before you can 1031 exchange a foreign property, you will first need to sell it. Selling is typically done through an intermediary unless the property is the seller’s personal residence, in which case it may be sold directly from the owner. Real estate practices, systems, and laws are different in every country around the world, so sellers must be aware of all of the regulations pertaining to the sale of their property.
Determining the Value of Your Foreign Property
Somewhat obviously, the value of your foreign property is going to be determined by a myriad of factors that will differ based on location. If you did not make any improvements on your property, then it will likely be sold at a similar value as to when it was purchased. If you are choosing to sell your foreign property by yourself, it is important to check the current market conditions in your area and adjust the price accordingly.
With the sale of foreign property, sellers must also consider the current exchange rate for local currencies back to USD. Everything on US taxes must be reported in US currency, so any gains on foreign property sales must be reported as so. Large differences in exchange rates may be responsible for net loss or gain on a property.
Taxes Paid on the Selling Foreign Property
Whenever a foreign property is sold by a US taxpayer, they will pay the IRS an amount of money that is commonly known as an “expat tax,” as the sum of a few different plausible taxations. In the event of a foreign property sale, the net loss or gain of the sale must be reported within Section D on that year’s income tax return. From there, losses cannot be written off, whereas gains are subject to taxation from federal, state, and capital gains taxes.
Gains up to $250,000 can actually be excluded from domestic taxation from the sale of foreign property abroad. Here, foreign properties that served as a taxpayer’s primary residence for at least 2 of the last 5 years are eligible for gains exclusions on property tax.
How to 1031 Exchange Foreign Property
If the net gain on your foreign property sale is large enough, then it will likely be subject to capital gains taxes in the sale’s calendar year. In the United States, the IRS has granted the unique opportunity to “trade” foreign properties in a 1031 exchange in order to defer capital gains taxes. Even if the taxation isn’t significant, utilizing a 1031 foreign property exchange in order to maximize property sales with new, cash-positive assets, will be well worth it.
Foreign Property Like-Kind Properties
Whenever a foreign property is 1031 exchanged, it must be “replaced” with a new, similar or “like-kind” property. While you may be selling land, buildings, or other high-ticket items overseas, personal property sales can be exchanged for many different kinds of assets in the United States. So long as you are selling a home, a building, or your foreign property, 1031 exchange can mitigate capital gains taxes if you purchase:
- Another physical property (in the US or abroad)
- Collectibles and artwork
- Conservation easements
- Mineral rights and royalties
- And more
Timeline For a 1031 Foreign Property Exchange
Once the property is sold, taxpayers then have to identify one new property within 45 days if they would like to remain eligible for the 1031 foreign property exchange. This does not necessarily need to be the purchased property, and two other potential assets can be properly identified, regardless of their value. If no new properties are purchased within 180 days of the sale, then the foreign property seller is no longer eligible for a 1031 exchange.
For additional requirements, please see our 1031 Exchange Rules and Requirements Page.
Using an Intermediary to 1031 Exchange Foreign Property
Due to the complexities of undergoing a 1031 foreign property exchange, most investors typically choose to use a specialty 1031 intermediary for the sale of property in relation to domestic taxation. In some cases, intermediaries are also able to help identify new properties that are best suited for the investor’s budget and goals.
What’s the Best 1031 Exchange For a Foreign Property?
Taxpayers are free to choose from a wide variety of new assets after the sale of a foreign property. But unlike in most countries around the world, United States property owners have the unique opportunity to 1031 exchange foreign property into mineral rights. With mineral rights, the subsurface of a property can then be elapsed or sold to oil and gas companies hoping to explore and extract minerals from the land. When these natural resources are sold, mineral rights owners are then entitled to mineral royalties, which come in the form of a monthly payment from the operation’s profits.
If your foreign property is not your primary residence then it will likely be necessary that capital gains taxes are paid. So long as you are not in the need of house hunting, mineral rights, and royalties service as the perfect reinvestment of wealth for the 1031 exchange of a foreign property. They are often hands-off investments with the potential for large streams of future royalty payments.