Here is a question we get more often than you would guess, usually from someone who has just returned from somewhere pleasant:
Can I sell my rental here and buy a place in Portugal with the proceeds, tax-deferred?
The answer is no. Not "it depends," not "with careful structuring." No. And the reason is one of the few genuinely bright lines in an area of tax law that otherwise runs on facts and circumstances.
Congress drew a border through Section 1031, and it does not bend.
The geography rule, in one sentence
Section 1031(h) states that real property located in the United States and real property located outside the United States are not property of a like kind.
That is the entire rule. It does not matter that both are apartment buildings. It does not matter that both are held for investment, that both produce rent, that the buyer is the same person and the intent is identical. Domestic and foreign real property simply are not like-kind to each other, by statutory definition.
For this purpose the United States means the fifty states and the District of Columbia.
What this actually permits
Once you see the border, the permitted moves become obvious:
- US property for US property. The ordinary case, and what nearly every exchange is.
- Foreign property for foreign property. Fully available, and underused.
- US property for foreign property. Not like-kind. Fully taxable.
- Foreign property for US property. Same problem in the other direction. Fully taxable.
The second one deserves more attention than it gets. If you own investment real estate abroad, Section 1031 is available to you on the same terms, because both sides of that trade sit outside the United States. A rental in Lisbon can be exchanged for a rental in Madrid.
We flag this because a fair number of otherwise reliable sources state that foreign property can only be exchanged within the same country. That restriction does not appear in the statute. The dividing line 1031(h) draws is US versus non-US, not country versus country. If an advisor tells you otherwise, ask them to point at the text.
The territories, where it gets genuinely strange
A handful of US territories occupy a middle ground. Under regulations issued in 2005, real property in the US Virgin Islands, Guam, and the Northern Mariana Islands can qualify as like-kind to US mainland property, subject to conditions tied to the taxpayer's income sourcing and filing posture in those territories.
Puerto Rico and American Samoa do not get this treatment.
This is a narrow, technical corner of the code and the conditions matter enormously. Nobody should plan a transaction around it without a CPA who has actually done one.
What it costs to get the direction wrong
A client sells a Napa vineyard property for $3.4 million against a $1.8 million basis, producing a $1.6 million gain, and wants to reinvest in the Douro Valley.
| Structure | Qualifies under 1031? | Rough federal tax due |
|---|---|---|
| Napa to Portugal | No. Crosses the border | Roughly $380,000 |
| Napa to Oregon vineyard | Yes | $0 deferred |
| Lisbon rental to Madrid rental | Yes. Both outside the US | $0 deferred |
| Napa to St. Thomas, USVI | Possibly, if conditions are met | $0 deferred, conditionally |
The $380,000 is illustrative: 20% federal capital gains plus the 3.8% net investment income tax, before any depreciation recapture, and before California, which will have its own view of a Napa sale. Your CPA determines the actual figure.
What makes this one sting is how avoidable it is. The client was not trying to do anything aggressive. He simply assumed that investment real estate was investment real estate.
The workaround people ask about, and why it usually fails
The common suggestion is to exchange into US replacement property first, hold it, and later sell and buy abroad. That works, in the narrow sense that each step is legal. But the second sale is a fully taxable event whenever it happens. You have deferred the tax, not escaped it, and you have added a round of transaction costs.
Structures involving foreign entities, or a US holding company that owns the foreign real estate, tend to fail for a different reason: after the 2017 tax law, Section 1031 applies to real property only. Exchanging entity interests does not get you there, and the foreign entity may bring reporting obligations that are considerably worse than the tax you were avoiding.
There is no clever path across this border. There is only planning around which side you want to be on.
If your goal is out of active ownership, not out of the country
Often the real motivation is not Portugal specifically. It is being done with tenants, repairs, and phone calls at eleven at night. If that is the actual goal, the domestic options are better than most people realize.
A Delaware Statutory Trust lets you exchange into fractional interests in institutionally managed property and receive distributions without operating anything. A 721 UPREIT can eventually convert that into operating partnership units. Both keep you on the correct side of 1031(h), because both are US real property.
DSTs are private placements offered only to accredited investors. They are illiquid, you give up control over the asset and the timing of its sale, distributions are not guaranteed, and you can lose principal.
For the mechanics of a standard exchange, see our exchange overview and the 45-day and 180-day deadlines. If you hold US property as a non-US person, FIRPTA withholding is the piece to understand first.
Common questions about foreign property and 1031
Can I exchange a US property for one in Canada or Mexico?
No. Both are outside the United States for this purpose, so neither is like-kind to US real property.
I am a US citizen living abroad. Does that change anything?
No. Section 1031(h) turns on where the property sits, not where you live or where you file.
Can I exchange property in France for property in Italy?
Yes. Both sit outside the United States, so 1031(h) does not separate them. Foreign law and local transfer taxes are an entirely separate question, and often the bigger cost.
Does Puerto Rico count as the United States for this?
No. Puerto Rico is not covered by the territory exception that reaches the US Virgin Islands, Guam, and the Northern Mariana Islands.
What if I already closed on a cross-border purchase believing it qualified?
Speak with your CPA immediately. The sale is taxable in the year it closed, and the priority becomes accurate reporting and managing the payment, not rescuing the exchange.