CRESCO RESEARCH
Americans ask whether they can roll a United States rental into a Dubai apartment and defer the tax. One sentence in the Internal Revenue Code answers it. The other half of that sentence is the part worth knowing.
Section 1031(h) of the Internal Revenue Code says real property located in the United States and real property located outside the United States "are not property of a like kind." That one sentence ends the question. You cannot sell a rental house in Texas, roll the gain into a Dubai apartment and defer the tax.
The gain on the American sale is recognized in the year you sell. There is no version of the paperwork that changes it. A qualified intermediary cannot change it. Holding the money for 45 days cannot change it.
There is a second half of the rule that almost nobody states, and it is the useful half. Foreign property can still be exchanged for foreign property. This page sets out both halves, the deadlines that apply to the half that works, and where every statement comes from.
The statute is short. Internal Revenue Code section 1031(h) is headed "Special rules for foreign real property" and reads, in full, that real property located in the United States and real property located outside the United States are not property of a like kind.
The IRS repeats it in plain words. Its like-kind exchange guidance states that "real property in the United States is not like-kind to real property outside the United States." The Form 8824 instructions say the same thing again.
Note what the test is not. It is not about the type of building. An apartment block and a strip of raw land can be like kind to each other. Grade and quality do not matter. Location does. The line is drawn at the border of the United States and nowhere else.
| You sell | You buy | Can section 1031 defer the gain? |
|---|---|---|
| US rental | Dubai property | No. Section 1031(h) blocks it. |
| Dubai property | US rental | No. The same sentence blocks it in reverse. |
| Dubai property | Other Dubai property | Yes, if every other section 1031 rule is met. |
| Dubai property | Property in another country outside the US | Yes, if every other section 1031 rule is met. |
| US rental | Other US rental | Yes, if every other section 1031 rule is met. |
The reason the middle rows work is that section 1031(h) draws only one line. It separates property inside the United States from property outside it. It does not separate one foreign country from another. Two properties on the same side of that line can be like kind to each other.
You pay the tax on the American sale first. Then you buy in Dubai with what is left. The sale and the purchase are two unrelated events as far as the Internal Revenue Code is concerned.
Three charges usually land on that sale. Capital gains tax on the appreciation. Tax on the depreciation you claimed over the rental years, which comes back as unrecaptured section 1250 gain. The 3.8 per cent Net Investment Income Tax if your modified adjusted gross income is above $200,000 single or $250,000 married filing jointly. Most states tax the gain as well.
The practical effect is that the Dubai purchase is smaller than the US sale price suggests. Work out the after-tax figure before you set a budget. We cover the tax on the other side of the trade, when you sell the Dubai property later, in US tax when selling Dubai property.
Dubai into Dubai is not a loophole. It is an ordinary section 1031 exchange that happens to sit on the foreign side of the line. Every standard requirement applies.
| Requirement | What it means | Source |
|---|---|---|
| Both properties held for business or investment | Property held primarily for sale does not qualify. Nor does a home you live in. | Section 1031(a)(1) and (a)(2) |
| 45 days to identify | The replacement property must be identified in writing within 45 days of transferring the property you gave up. | Section 1031(a)(3)(A) |
| 180 days to close | You must receive the replacement property within 180 days of the transfer, or by the due date of that year's return including extensions, whichever is earlier. | Section 1031(a)(3)(B) |
| You never touch the money | Proceeds go to a qualified intermediary. Constructive receipt of the cash ends the exchange. | Form 8824 instructions |
| Form 8824 is filed | If you transferred property in a like-kind exchange during the year you must file Form 8824 with that year's return. | Form 8824 instructions |
| Related party sales are watched for two years | If you or a related party disposes of the property received within two years, the deferred gain generally has to be reported. | Section 1031(f), Form 8824 instructions |
One more constraint that bites in Dubai. Since the 2017 tax law, section 1031 covers real property only. Exchanges of machinery, vehicles, artwork and intellectual property stopped qualifying for exchanges completed after 31 December 2017. A Dubai off plan contract that has not yet become a registered property interest is a question to put to your adviser before you rely on it.
It does not. An American apartment building and a Dubai apartment building are the same kind of asset in every ordinary sense and they are still not like kind. Location is the only test that matters here.
A qualified intermediary solves the constructive receipt problem. It does not make blocked property eligible. Running a US to Dubai purchase through an intermediary produces a failed exchange and a taxable sale, plus the intermediary fee.
It runs both ways. Americans who already own in Dubai sometimes assume they can exchange into a US rental on the way home. Section 1031(h) blocks that too.
Two paths, and they are both ordinary.
The first is to sell, pay the tax, and buy in Dubai with the net. The attraction of Dubai for an American buyer was never a federal deferral. It is the absence of annual property tax and the absence of tax on the rent at the Dubai end. Those apply whether or not an exchange was involved.
The second is to keep the two sides of the portfolio separate. US property exchanges into US property. Foreign property exchanges into foreign property. An American who already owns one Dubai unit and wants a different one has a real exchange available. An American starting from a US rental does not.
Everything above comes from the statute and from IRS guidance. The texts used were Internal Revenue Code section 1031, including subsections (a)(1), (a)(2), (a)(3), (f) and (h), the IRS like-kind exchanges real estate tax tips page, and the instructions to Form 8824. Each is linked at the point where it is used.
What this page does not do. It does not quote tax rates, because the rate that applies to a given sale depends on your income, your filing status, your holding period, your state and the depreciation you claimed. It does not cover Opportunity Zones, Delaware Statutory Trusts or installment sales, all of which are United States structures and none of which change section 1031(h). It does not address what the Dubai Land Department requires on the purchase side, because that is a registration question and not a tax one.
The reading that foreign property is like kind to other foreign property rests on the fact that section 1031(h) draws one line only, between property inside the United States and property outside it. The statute does not say a Dubai property is like kind to a Lisbon property in so many words. Confirm the position with your own adviser before you commit to a timetable.
This is general information and not tax advice. The rules turn on facts that are specific to you. Speak to a CPA or a tax attorney who handles cross-border property before you sell anything.
No. 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. The gain on the US sale is recognized in the year of the sale.
Section 1031(h) draws its line between US and non-US property, not between one foreign country and another, so two properties outside the United States are not separated by that subsection. Every other requirement still applies, including the 45 day identification period, the 180 day completion period, the use of a qualified intermediary and the filing of Form 8824. Confirm your specific facts with a CPA.
Section 1031 applies to exchanges of real property. Exchanging shares in a company is not an exchange of real property, and since the 2017 amendment section 1031 no longer covers that kind of asset at all. A company structure does not reopen the door that 1031(h) closes.
A completed like-kind exchange is reported on Form 8824 with the return for the year of the transfer. A failed or blocked exchange is reported as an ordinary sale. Where a related party was involved, Form 8824 is also filed for the two following years.
Not through section 1031. Anyone offering you a structure that claims otherwise is describing something the statute rules out in one sentence. Ask them to show you the sentence.
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