No CGT, Says IRS

Date: 05/19/2006

International Living Postcards--Saturday Edition

Saturday, May 20, 2006
Puerto Plata, Dominican Republic

Dear International Living Reader,

A quick addendum to our reporting from the Global Real Estate Forum these past two days.

Several readers wanted me to clarify the position of the IRS re: Section 1031 of the Internal Revenue Code, also known as "like-kind exchanges."

Here's the scoop: This incredibly powerful wealth-building strategy has been around since 1921 and is still used by the country's most savvy real estate investors. Remarkably, the IRS made this tax deferral possible.

Through like-kind exchanges, property owners responsible for paying taxes to the U.S. government from the sale of either U.S.-based or foreign-based properties can defer payment of the capital gains taxes.

Perhaps most important, like-kind exchanges allow you to use the funds that would have otherwise gone into the government's coffers to significantly increase the net worth of your real estate portfolio.

It's simple to take advantage of, can be used on several properties at once (even between family members), and is an excellent estate-planning tool…but timing is critical, and the IRS is immovable when if comes to granting extensions.

You can also defer capital gains tax on foreign property through Section 1031. Your accountant may tell you otherwise; that exchanges can only be made within the U.S. and that a change to the law in the 1980s ruled out the participation of foreign properties. Technically, he's correct, but he's not telling you the full story.

Here's the important part: It has to be a like-kind exchange, i.e. you can sell a foreign property and defer the capital gains tax if you buy another foreign property (both properties don't have to be in the same country…but they both have to be outside the U.S.).

You cannot sell a U.S. property and defer the capital gains tax from that sale by buying a foreign property.

We recommend Janice Houff of First American Exchange Company to help you with this complex but rewarding structure, e-mail: jhouff@firstam.com.

Lief Simon
For International Living

P.S. You have 2 days left before the membership window closes for applications to The Ultimate Real Estate Buyer's Club. Benefits include insider access to some of the world's top land experts, deeply discounted real estate, plus recordings of what I feel are my two most valuable live Global Real Estate Forum presentations. For full details, see here.