International 1031 exchanges – advances tax solutions for Americans selling investment property outside the United States

International 1031 exchange – advanced tax planning for Americans selling investment property outside the United States

The United States taxes US citizens, residents and green card holders on their worldwide income, regardless of where they live. This includes the taxation on the sale of foreign real estate.  This article explains how the 1031 rules can be used to avoid US taxation on such sales.   

Monte Silver is a US tax attorney who specializes in solving high-value US tax matters where there is an international component.  Silver & Co. exclusively represents US taxpayers and non-US taxpayers with regard to their US tax issues, including international 1031 exchanges. 

For over thirty years, the law offices of Silver & Co. has specialized in providing high-value tax planning services for businesses and individuals outside the US who have US tax matters.  Prior to founding the firm, Monte Silver worked at the Internal Revenue Service and at the U.S. Tax Court where he specialized in US taxation and tax litigation.  Since founding his firm, Mr. Silver has focused is practice solely on representing clients outside the United States with regard to the high-value issues they face in the United States, or with the US authorities

What is an international 1031 exchange?

To understand what an international 1031 exchange is requires us to understand what an 1031 exchange is.  A 1031 exchange is a situation where a US taxpayer (i) sells an old investment property for a profit, (i) uses the proceeds to buy a new investment property,  where the (iii) profit from the sale of the old property is exempt from US tax.

In other words, a 1031 exchange is a situation where a taxpayer sells an investment property for a profit but pays no US taxes on the profit so long as the proceeds from the sale are rolled over to purchase a new investment property. 

An international 1031 exchange is a simply 1031 exchange where both the old and new investment properties are located outside the United States. 

Why is the 1031 exchange important?

Consider the following example:  You are a US citizen or green card holder residing in either Hong Kong or Israel. Assume you own an investment property in that country that has greatly appreciated in value.  You now want to sell the property and use the money to buy a new investment property in that country.  Assume that the profit from the sale is either (i) exempt from tax in Hong Kong (or Israel), or (ii) subject to very low tax in that country.

The problem is that the sale is not exempt from taxes in the US.  As a result, you will pay 20% US capital gains tax and 3.8% Net Investment Income Tax on the sale.  If you reside in the US, you will also pay local state tax on the gain – an additional 10% if you live in California or New York.  The result?  Between 23.8% or 30% US tax, even though the sale is exempt from taxes in the country where the property is located.  And if the profit is $1,000,000, that is at least $250,000 in US taxes down the drain. 

This is where the 1031 exchange comes into play.  If the sale and purchase of the investment properties is done correctly, ZERO US taxes will be due!!!  In other words, tax savings of between $250,000/$300,000 per million dollars of profit.

If the potential for tax savings are so significant, why do so few taxpayers use the international 1031 exchange?

Why do so few people know about the international 1031 exchange, or use it?

  • Virtually all US-based tax and 1031 experts deal only with domestic 1031 exchanges – ie exchanges where the properties are located in the US.  Different laws and practices apply in international 1031 exchanges.  US professionals simply do not understand international 1031 exchanges and keep away from them


  • US CPAs outside the US cannot begin to understand how to conduct international 1031 exchanges and avoid them.  

Our firm, on the other hand, is made up of US tax experts who place a premium on identifying the high-value problems of our clients, and solving these problems effectively with out risk.  The international 1031 exchange is one example.  Our firm has vast experience in international 1031 exchanges. We utilize our expertise to implement such exchanges risk free, and save our clients vast amounts of money in US taxes.

Core issues in international 1031 exchanges

  1. Ignore what others tell you.  An international 1031 exchange is relatively easy if you know what you are doing.
  2. Tax in the country where the land is located. By far, the biggest barrier to an international 1031 exchange is whether or not the sale of the old property is taxable or tax free where the property is located. The international 1031 exchange will save you lots of money if either (i) tax free in that country, or (ii) subject to law tax in that country.




  1. The tax rate is zero in that country. In such case, for each $1,000,000 of gain, you will save between $238,000 -$300,000.
  2. If the tax rate on the sale in that country is 20% or higher, you will save only 3.8% on the gain ($38,000 per $1,000,000 gain).
  3. If the tax rate on the sale in that country is between 0-20%, you will have 3.8% plus the difference between 20% and the tax rate in that country. For example, assuming a tax rate of 10%, you will save 13.8% per each million gain.


  1. Possession of money. You cannot !!! have possession of the money generated from the sale of the old property.  If you have possession of the money from the sale of the old property, then the 1031 exchange will not work.




You sell an old investment property, get the money, and then buy a new investment property with all that money.  In such a situation, you will not be entitled to tax free 1031 exchange.


On the other hand, what happens if you: (i) you sell the old property for $2,000,000, (ii) have $1,000,000 of that money directly transferred to a “1031 exchange trustee who uses the money to buy a new investment property, and (iii) take home $1,000,000 of the profit?  In such case, assuming all the other 1031 rules are followed, you will only pay US tax on the $1,000,000 you take home.  The $1,000,000 used to buy a new property is not subject to US tax.


  1. Must the money be wired to the United States to a US-based 1031 trustee? No!!  The money generated from the sale of the old property does not have to leave (i) the country (i) where the old property is located or (ii) where the taxpayer lives.  There is no need to wire any money internationally for an international 1031 exchange to apply!!  This is a key issue as most taxpayers will want to avoid wiring money internationally


  1. You must identify the new property within 45 days of transferring the old property. You must also complete the exchange 180 days of transferring with old property.  But what does “transferring” mean?  In the United States, transfer happens at the close of escrow.  Most other countries do not have similar escrow processes and property (both title and possession) is usually transferred when the buyer makes the final payment under the contract.  As stated above, international 1031 exchanges are unique.  Counting the 45/180 days involves understanding the real estate practices in the country where the land is located.

To summarize, an International 1031 exchange can save a US taxpayer vast amounts of money.  However, very few professionals understand how the international 1031 exchange works.

If you are a US taxpayer and are considering selling a non-US investment property and then buying another non-US investment property, contact us to discuss your options.


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