IRC Section 1031(h) states plainly that U.S. real property and real property located outside the U.S. are not like-kind, so an exchange between the two is barred in either direction. Foreign-to-foreign exchanges remain allowed when both properties sit outside the U.S.
The rule at the border
A 1031 exchange is forgiving about what counts as a fair trade. Sell one investment property, buy another, and you defer the capital gains tax, as long as the two are "like-kind," the tax code's term for property of the same broad type. For real estate that net is wide: almost any property qualifies as like-kind to almost any other. The one line it will not cross is the U.S. border.
Congress wrote that border into the statute. Section 1031(h) says:
Real property located in the United States and real property located outside the United States shall not be treated as property of a like kind.
U.S. property and foreign property are not like-kind, and the bar runs both ways. You cannot roll a U.S. sale into foreign real estate, and you cannot roll a foreign sale into U.S. real estate. There are no exceptions and no workarounds, and the type, use, or value of the properties makes no difference.
What still works
Two kinds of exchange stay open.
U.S. to U.S. is the ordinary case. Any U.S. real property can be exchanged for any other, whatever the type, the location within the country, or the use. A California apartment building can be swapped for a Texas industrial warehouse under the standard 1031 rules.
Foreign to foreign qualifies too, as long as both the property you sell and the property you buy sit outside the United States. A commercial property in France can, in principle, be exchanged for a residential property in Germany. "In principle" is carrying weight in that sentence. These deals are rare, and they pile up practical problems: finding a qualified intermediary, the third party who holds the sale proceeds so the money never passes through your hands, who also has international experience; currency risk; foreign tax exposure; and documentation under both U.S. and local law, where the 1031 rules and the other country's tax treatment can pull in different directions. They need specialist guidance.
U.S. territories
Property in a U.S. territory - Puerto Rico, Guam, the U.S. Virgin Islands, the Northern Mariana Islands - sits in a gray zone. The IRS does not treat territory property as uniformly "U.S." or "foreign" across all tax purposes; the answer depends on the specific territory, the specific provision, and the facts of the deal. Don't assume territory property counts as U.S. property for 1031, and don't assume it counts as foreign either. This is specialist ground that calls for a tax professional with direct experience in territory tax law.
Why the line exists
Congress added subsection (h) in 1989, and the reasoning is practical.
The first reason is enforcement. U.S. real estate leaves a clear paper trail through title records, appraisals, and transparent closings, so the IRS can verify a valuation and confirm an exchange met the rules. Foreign transactions run through different legal systems and documentation standards, with limited IRS access to the records. Allowing cross-border exchanges would open enforcement gaps.
The second reason is scope. The 1031 deferral is meant to keep investment flowing into U.S. real estate, not to help capital move offshore while the tax bill waits.
Paths to international exposure
A 1031 exchange cannot carry you from U.S. property into foreign property. Investors who want international exposure tend to look at three routes, each with its own tax treatment.
The first is to sell and pay the tax: sell the U.S. property, pay the capital gains tax, and put the after-tax proceeds into foreign real estate. Straightforward, and expensive.
The second is to keep the two portfolios separate: continue the domestic 1031 chain on U.S. property while building foreign holdings with other capital, such as rental income, savings, or proceeds from other investments.
The third runs through securities rather than deeds. REITs, real estate investment trusts that own property and trade like stocks, along with funds that hold international real estate, are securities rather than direct property, so 1031 never enters the picture. They are bought with after-tax money and offer geographic diversification without direct ownership of foreign buildings.
Each path carries different tax consequences. A professional who understands both U.S. real estate tax and international tax planning can coordinate a domestic 1031 strategy with international goals.
A 1031 exchange won't move an investor from U.S. property to foreign property, or the reverse. The alternatives, including selling and paying the capital gains tax or gaining exposure through international REITs and funds, all sit outside the 1031 rules.
Frequently asked questions
Can I exchange my U.S. rental for a property in Canada or Mexico?
No. Section 1031(h) bars exchanges between U.S. and foreign real property. Both properties have to be in the U.S., or both outside it.
What about territories like Puerto Rico or the U.S. Virgin Islands?
It depends. Some U.S. territories may count as domestic for tax purposes, but the treatment is genuinely complex, so check with a professional before assuming a territory property qualifies for a 1031 exchange.
Can I do a 1031 with foreign property if both are outside the U.S.?
Yes. Foreign-to-foreign exchanges are allowed. The qualified intermediary and the reporting get more complex, so specialist guidance matters here.
What's the alternative if I want to invest internationally?
Common routes are selling and paying the capital gains tax before reinvesting the proceeds, or gaining exposure through international REITs, mutual funds, or ETFs, which fall outside the 1031 rules entirely.
Does the 1031 restriction apply to personal residences?
The geographic restriction applies to all real property in a 1031 exchange. Personal residences sit outside 1031 anyway and have their own treatment, including the primary residence gain exclusion.