Can Foreign Property Qualify for a 1031 Exchange?

Foreign real estate cannot be exchanged for U.S. real estate under Section 1031, and the reverse fails too. The statute draws a line on location, not on property type: <cite index="1-1">real property located in the United States and real property located outside the United States are not property of a like kind</cite> (26 U.S.C. § 1031(h)). That one sentence decides whether a Delaware Statutory Trust can ever function as replacement property for an investor selling a building abroad.

Why the location test decides the outcome

An investor selling a rental property in Portugal or Mexico and planning a 1031 exchange into U.S. real estate runs into a wall that rarely comes up at the closing table. The gain does not defer, no matter how closely the replacement property resembles the one sold.

This is not a facts-and-circumstances question settled deal by deal. Location, not property type, use, or value, is what Section 1031(h) tests. Once the relinquished asset sits outside U.S. borders, the domestic replacement-property universe is off the table — including the DST offerings assembled in the Top1031 directory, which are built on U.S. real property identified in SEC filings.

Can foreign property qualify for a 1031 exchange?

No — not when it is paired with U.S. real property. A foreign warehouse is not like-kind to a domestic warehouse; a foreign apartment building is not like-kind to a domestic one. The mismatch is statutory, so no structuring choice, holding period, or valuation cures it.

Foreign-to-foreign is a different matter. <cite index="3-6,3-7">Real estate in one state can be exchanged for real estate in the same or another state, and foreign real estate can be exchanged for foreign real estate</cite> (First American Exchange). The statute separates U.S. property from everything outside it; it does not sort by country.

A "yes" in that table clears the like-kind hurdle only. Qualified use, identification and closing deadlines, debt replacement, and boot are separate tests an exchange still has to satisfy.

Where the line sits in the statute

Section 1031(h) once carried a second prong for personal property. <cite index="4-2,4-3">The Tax Cuts and Jobs Act amended subsection (h), which previously covered both foreign real and personal property and treated personal property used predominantly inside and outside the United States as not like-kind</cite> (Tax Notes, IRC § 1031). What survives is the single real-property sentence, because Section 1031 now reaches real property only. Citations to "1031(h)(1)" or "1031(h)(2)" refer to the pre-2018 text (2011 U.S. Code text).

The practical contours:

• The test looks at where the property sits. A foreign strip mall and a domestic strip mall of identical value still fail against each other.
• It is a bright line, not a proximity question. Nothing softens it for property near a U.S. border.
• It applies the same way to all-cash and leveraged deals, and across property types — multifamily, net lease, industrial, storage.

The narrow territorial coordination rules

Some U.S. territories are handled through separate coordination provisions rather than Section 1031 itself. <cite index="2-2,2-3">Until 2008, only property in the U.S. Virgin Islands had this status for § 1031 purposes; effective April 29, 2008, Treasury adopted final regulations under § 935 extending identical treatment to Guam and the Northern Mariana Islands</cite>. The relief is conditional: <cite index="2-4">a U.S. citizen or resident domiciled in the U.S. exchanging U.S. investment property for replacement property in the Virgin Islands, Guam, or the Northern Mariana Islands may do so only if the person is subject to tax in both the U.S. and the respective territory for the year the exchange is completed</cite> (Asset Preservation). <cite index="0-2">Puerto Rico is not among those coordinated territories and is not treated as part of the United States under the § 932 and § 935 rules</cite>. These provisions turn on the taxpayer's own filing posture, so the treatment of any specific territorial property is a question for a CPA or 1031 exchange attorney on the actual facts.

What this means for DST replacement property

DST programs built for the 1031 market hold U.S. real estate, because the exchange rules that make the structure useful assume a domestic relinquished property. The logic runs both directions: a DST holding U.S. real estate is not usable replacement property for an investor relinquishing a foreign asset, since the location test blocks the pairing before any offering-level analysis begins.

That is a structural feature of the market rather than a gap in coverage. The offerings in the current DST offering cohort are assembled from SEC EDGAR filings for trusts holding U.S. property. Those trusts are typically Regulation D 506(b) or 506(c) offerings — exempt from registration, not registered. A Form D on EDGAR is a notice of an exempt offering; it is neither the private placement memorandum nor any form of SEC approval.

An investor who sold foreign real estate and wants U.S. exposure is looking at a taxable sale followed by an ordinary purchase — a direct purchase of U.S. replacement property, a DST interest, or anything else — with no Section 1031 deferral attached, because the exchange never qualified in the first place.

Foreign real estate is not the only asset that fails like-kind for reasons unrelated to property type. Business goodwill doesn't qualify for a 1031 DST exchange either, on different grounds: after the 2017 changes, it is not real property at all.

Deadlines still apply — and they are not the issue here

Every 1031 exchange runs on the same clock: 45 days from the transfer of the relinquished property to identify replacement property, and 180 days to close — or the due date of the tax return for the year of the transfer, including extensions, whichever comes first. Filing an extension is what preserves the full 180 days for a late-year sale. The IRS has also granted postponements of these deadlines in federally declared disaster situations, so "no exceptions ever" overstates the rule.

None of that rescues a foreign-to-domestic exchange. Identification and closing windows govern timing; the location test governs eligibility, and an exchange has to clear eligibility first.

Common questions

Can foreign real estate be exchanged for other foreign real estate?

Yes. Two properties outside the United States can be like-kind to each other — a Spanish rental into a Portuguese one, for example — because the statute draws its line at the U.S. border, not between countries. Currency conversion, local transfer taxes, and foreign title mechanics add friction the statute says nothing about.

Does a U.S. territory count as domestic or foreign?

It depends on the territory and on the taxpayer. The coordination regulations under §§ 932 and 935 cover the U.S. Virgin Islands, Guam, and the Northern Mariana Islands for taxpayers subject to tax in both jurisdictions; Puerto Rico is not covered. Because the analysis turns on individual filing status, it warrants professional review before a relinquished property closes.

I already sold foreign real estate. Can I still buy U.S. property with the proceeds?

Yes, but not as a 1031 exchange. The sale is taxable and the purchase is an ordinary acquisition. Hitting the 45-day or 180-day marks does not convert a like-kind failure into a deferral.

Does the foreign/domestic rule still apply to personal property?

Section 1031 applies only to real property for exchanges after 2017, so the old predominant-use test for personal property no longer bears on any current exchange.

Can a Delaware Statutory Trust hold foreign real estate?

DST programs marketed to 1031 investors hold U.S. real estate, which is what makes them usable for a domestic relinquished property — and what rules them out after a foreign sale. A DST's trustee powers are also constrained by the Revenue Ruling 2004-86 safe harbor, the ruling that treats a qualifying DST interest as an undivided interest in real property for Section 1031 purposes.

What hasn't moved

The 2017 overhaul rewrote Section 1031 around real property and stripped the personal-property prong out of subsection (h). The foreign-property sentence stayed exactly where it was. Investors comparing DST offerings today are working inside a location test that predates the DST replacement-property market itself — and that has outlasted the last major rewrite of the statute.

Compare tracked DST offerings

Browse the directory built from SEC filings on U.S. DST offerings: Top1031 Offering directory

Related guides

• DST pros and cons for 1031 exchange investors