BajaNomad - "1031 exchange" to reduce US tax on foreign real estate sale - referrals?

"1031 exchange" to reduce US tax on foreign real estate sale - referrals?

oladulce - 9-1-2008 at 03:10 PM

Has anyone used the "1031 exchange" process to defer your US capital gains taxes when you've sold property outside the US and replaced it with another foreign property?

Any recommendations for a reputable "Intermediary" group (which is required to hold the funds between your property sale and the purchase of the replacement property) ?

Any suggestions for a Tax professional who has experience with the IRC 1031 exchange process on foreign real estate?

[Edited on 9-2-2008 by oladulce]

Coatlallope - 9-1-2008 at 04:02 PM

Be very careful if your property is in Mexico and in a fideicomiso. A beneficial interest in a trust is not a 1031 qualified asset for an exchange. It does not matter that the fideicomiso represents a 100% interest in the underlying real estate.

You also need to worry about Mexican tax law if you are a tax resident for Mexican tax purposes. The notarios are responsible for calculating the gain on the sale and the tax to be paid and they use Mexican law.

This answer is a very good start

thebajarunner - 9-1-2008 at 04:28 PM

Quote:

Originally posted by Coatlallope
Be very careful if your property is in Mexico and in a fideicomiso. A beneficial interest in a trust is not a 1031 qualified asset for an exchange. It does not matter that the fideicomiso represents a 100% interest in the underlying real estate.

You also need to worry about Mexican tax law if you are a tax resident for Mexican tax purposes. The notarios are responsible for calculating the gain on the sale and the tax to be paid and they use Mexican law.

You can take a quick look at this site from Cornell, it is a good, if brief summary.

http://www4.law.cornell.edu/uscode/uscode26/usc_sec_26_00001...

Clearly, unless you hold outright title (not in trust) then you have no rights to use the exchange section.

Also, to clarify (which you have done) it is not eligible for exchange of U.S. property for foreign property, or vice versa.

You need some better help on this than you will find here, IMHO

oladulce - 9-1-2008 at 05:45 PM

Quote:

Luckily the property we're selling is in Nicaragua where a foreigner can own property on the beach fee simple and there is no Nicaraguan capital gains tax on the sale of real estate so the US tax will be the only concern.

But we're going to scout in another part of Mexico for a possible "exchange" for the Nica property, and Coatlallope and bajarunner's point about the damn fidecomiso brings up more questions.

All the more reason to find a "professional" who is familiar with this process.

wilderone - 9-2-2008 at 09:09 AM

The exchanged property needs to be of like-kind, held for investment purposes, with documentation to prove it. (Sec. 1031(a)(1): "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.") Recent IRS rulings have clarified the "held for investment" as it applies to property other than your primary residence. It was a grey area for years. The recent ruling states that the exchanged property should be rented at least 30 days per year. Your yearly tax filings should reflect that income and would establish it as rental property (or property held for investment). You need to differentiate it from just a second home, vacation home -- you cannot use it for personal use for more than 14 days per year or 10% of the actual number of days the property has been rented in a given year.

The Sculpin - 9-3-2008 at 10:27 AM

Here is something I lifted from BNA on the leasehold issue. I agree that you may have an issue with personal use, but I disagree that you are required to rent real property for it to be an investment. In my past life in public accouting, I hade several clients who would buy houses all over the world with no intention of living in or renting them. They were there just to park cash and to take advantage of currency fluctuations (there are a few of these on the east cape!). SOme were even used in §1031 exchanges. Another issue you may have to deal with is expatriation of cash. Not all soverigns share the view that cash is fungible and can cross borders unfettered. There can be export taxes regardless if there is no other form of tax.

Hope this helps. If you want to see the PLR's just go to IRS.gov
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>&g t;>>>>

A leasehold represents less than a fee interest in real estate. However, a leasehold for a sufficiently long period of time vests in the owner certain attributes that make his interest and a fee interest of like kind. A lease with 30 years or more to run and a fee interest in real estate are of a like kind (Regs. §1.1031(a)-1(c). See also PLR 9243038 (citing Rev. Rul. 68-394, 1968-2 C.B. 338, IRS ruled that exchange of fee interests in land for long-term leases on buildings on land already owned by taxpayer qualified as like-kind exchange)). In PLR 8453034, an exchange of a fee interest in a motel for a 77-year leasehold interest in another motel qualified under §1031(a)(1). Optional renewal periods are included in determining whether a lease for a period of years is of a like kind to a fee interest (See Rev. Rul. 78-72, 1978-1 C.B. 258 (25-year leasehold with renewal options for three 10-year periods)).

DianaT - 9-3-2008 at 11:07 AM

Quote:

Originally posted by wilderone
The exchanged property needs to be of like-kind, held for investment purposes, with documentation to prove it. (Sec. 1031(a)(1): "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.") Recent IRS rulings have clarified the "held for investment" as it applies to property other than your primary residence. It was a grey area for years. The recent ruling states that the exchanged property should be rented at least 30 days per year. Your yearly tax filings should reflect that income and would establish it as rental property (or property held for investment). You need to differentiate it from just a second home, vacation home -- you cannot use it for personal use for more than 14 days per year or 10% of the actual number of days the property has been rented in a given year.

Very good information. Here is another item that many people confuse.

A 1031 exchange does not reduce or eliminate your capital gains, it only defers them. Some people refer to it in ERROR as a 1031 Tax Free Exchange.

Also, the correct paper work is so important and we always found it difficult enough to explain to clients in the US, I just can't imagine explaining it in this case. The buyer of your property would have to sign papers buying the property you want in Mexico and then exchange it. Easy enough to do with good escrow people in the US---just a matter of paper work.

There are delayed 1031 exchanges, but I have also seen people have them thrown out because they took control of the money during the delay.

With the IRS, the only real way to eliminate Capital Gains is to die---then your heirs can get a stepped up basis, sell the property and show no gain. But it is a big price to pay on your part. :lol:

Good Luck
Diane

thebajarunner - 9-3-2008 at 02:51 PM

Quote:

With the IRS, the only real way to eliminate Capital Gains is to die---then your heirs can get a stepped up basis, sell the property and show no gain. But it is a big price to pay on your part. :lol:

Good Luck
Diane

The better way is to have your property in community interest and have your wife die :yes:

Oh, and make sure you have her insured as well..

(good thing mine does not read this board)

wilderone - 9-3-2008 at 03:37 PM

"I agree that you may have an issue with personal use, but I disagree that you are required to rent real property for it to be an investment."
Si, that was precisely the grey area for so many years and for me personally. I was fixing up a property and didn't want the hassle of renting it, and I did not use it for personal use more than 14 days out of the year. I contacted IRS people, and researched IRS rulings and did not find cases on point. The IRS guy I explained the situation to told me I'd have to pay $10,000 for a private letter ruling. (The IRS is really not very helpful.) So this recent ruling came out, and I haven't read it word for word yet, but this may be a hurdle for some who have been skirting the regulations in the past. (Ask a 1031 specialist.) I'm just laying out some of the considerations. If you file your tax docs with deferred capital gains, get audited, and the IRS differs in their analysis of the matter, you will not only owe the capital gains, but penalties and interest as well.

oladulce - 9-3-2008 at 07:38 PM

Quote:

Originally posted by The Sculpin
... Another issue you may have to deal with is expatriation of cash. Not all soverigns share the view that cash is fungible and can cross borders unfettered. There can be export taxes regardless if there is no other form of tax.

Oh for heaven's sake, I haven't heard anything about an export tax on the proceeds of a real estate sale in Nicaragua , but i'll look in to it. Thanks Sculpin.

I'm not even sure what kind of tax specialist I should be looking for- A tax attorney? An accountant with foreign investment experience? Something else? An "advisor " of some kind would be the most helpful because we know nothing about this stuff. Any suggestions?

wilderone - 9-4-2008 at 08:57 AM

Most CPAs who have a heavy practice in tax returns (vs. corporate bookkeeping) should be knowledgeable about the treatment of foreign investments. You might have to pay for a phone consultation or office visit. Also, the 1031 intermediary companies should be able to advise you. There are tons of them. Get several opinions. Try Exchange Resources, INc. toll 877-799-1031. This guy says he's trained to "help clients over a wide geographic area including Mexico, Costa Rica, etc.) George Jonilonis, 858/278-4040. I got some info online here: www.taxlinks.com/rulings. Try www.the1031company.com - 1031 Real Estate Exchange Services, 941-472-0074 (Sanibel, FL).

Bob and Susan - 9-4-2008 at 09:11 AM

oladulce...this is a great discussion...but...

i think you are "fighting the wave"

just pay the tax and move on...

sleep nights...restful sleep :lol:

continue....

wilderone - 9-4-2008 at 09:41 AM

Is this helpful? V. complex situation.

Rev. Rul. 69-70

Advice has been requested whether the income of a foreign trust, under the circumstances described below, is taxable to the beneficiary, an individual who is a resident of the United States.

X, a nonresident alien individual, created a foreign trust for the benefit of a resident of the United States. Under the terms of the trust instrument, X reserved absolute power to dispose of the beneficial enjoyment of both the income and the corpus of the trust. The trustees were nonresident aliens, and all of the trust property had a situs outside of the United States.

When income-producing property is placed in trust, the Federal income tax liability generally shifts from the grantor to the trust and beneficiaries in accordance with subparts A through D of part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1954 (sections 641 through 669).

However, where the grantor retains dominion and control over the income and corpus of the trust, subpart E of subchapter J (sections 671 through 678), rather than subparts A through D of subchapter J, is applicable. Under section 671 of the Code, where the grantor is treated as the owner of any portion of a trust, there are included in computing the taxable income and credits of the grantor, those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account in computing taxable income or credits against the tax of an individual.

Since X, a nonresident alien grantor, retained the absolute power to dispose of the beneficial enjoyment of both the income and the corpus of the trust, he is treated as the owner of the trust under section 674(a) of the Code. Accordingly, an individual beneficiary who is a resident of the United States is not taxable on that portion of the income distributed to him from the foreign trust which is considered to be owned by the nonresident alien grantor under subpart E of subchapter J of the Code.

It should be noted that United States source income of a foreign trust controlled by a nonresident alien grantor is taxed to the grantor. If the grantor is a resident of a non-treaty country, the provisions of section 871 of the Code apply concerning the tax. However, if the grantor is a resident of a treaty country, the provisions of the treaty may determine the tax.

oladulce - 9-4-2008 at 10:00 AM

Quote:

Originally posted by Bob and Susan
i think you are "fighting the wave"

just pay the tax and move on...

sleep nights...restful sleep :lol:

Your probably right Bob, that's what'll happen. But we've made some costly mistakes in the past, especially with Mexico real estate/tax situations, and if there's a way to keep just a few of our hard-earned pennies this time, then I better do the reasearch.

Thank you very much wilderone. The R.E. agent on the Nica property has had clients use these guys also bayview as the Intermediaries and coordinators of 1031 transactions.

But I'll feel better consulting with an (unbiased ) tax advisor beforehand to make sure this is a smart move so I'll look in to CPA's with foreign investment experience.

vacaenbaja - 9-6-2008 at 03:01 PM

CPAs are fine, but if it is the IRS that you fear it may not be a bad idea to consult with some of the very people that will be looking over these transactions. There are several tax firms that employ ex IRS people. I do not know if they would be any better than the forementioned options. Just a thought.

DianaT - 9-6-2008 at 03:07 PM

Quote:

Originally posted by thebajarunner
With the IRS, the only real way to eliminate Capital Gains is to die---then your heirs can get a stepped up basis, sell the property and show no gain. But it is a big price to pay on your part. :lol:

Good Luck
Diane

The better way is to have your property in community interest and have your wife die :yes:

Oh, and make sure you have her insured as well..

(good thing mine does not read this board)

OK, OK, I want your wife´s name-----she and I need to talk. :yes:

I bet IRS knows who she is----

:lol:

Diane

[Edited on 9-6-2008 by jdtrotter]