Can I avoid capital gains tax by rolling US rental property sale profits into foreign property purchase?

So I'm about to sell my second home in the US which I've been renting out for the past few years. The market's good and I'm looking at making a decent profit on the sale. I've been eyeing property overseas and wondering about the tax implications if I use the profits from my US rental to buy a property in another country. Specifically, I want to know if I can avoid paying capital gains tax if I roll the profits from my US rental property sale into buying a foreign property within the same tax year? I've heard about the 1031 exchange for deferring capital gains when you reinvest in similar US properties, but does this apply internationally? I'm planning to complete both transactions before December so it all happens in the same tax year. Will the IRS still hit me with capital gains tax even though I'm essentially just trading one property for another? Any advice from someone who's navigated this before would be super helpful!

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18 comments

Emma Thompson

•8M

This is a good question about international property exchanges! Unfortunately, Section 1031 like-kind exchanges (which allow you to defer capital gains tax when selling investment property and purchasing similar property) are limited to real property located within the United States since the Tax Cuts and Jobs Act of 2017. So even if you complete both transactions within the same tax year, you will still need to pay capital gains tax on the profit from your US rental property sale. The fact that you're reinvesting those funds into a foreign property doesn't provide any tax deferral under current IRS rules. Be sure to calculate your gain correctly by subtracting your adjusted basis (original purchase price plus improvements minus depreciation taken) from the sale price. Depending on how long you've owned the property, you'll either pay long-term capital gains rates (if held more than a year) or short-term rates (taxed as ordinary income).

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Emma Thompson

•8M

Setting up a foreign business entity doesn't change the fundamental tax treatment in this case. The IRS looks at the substance of the transaction, and you would still be subject to capital gains tax on the US property sale regardless of how you structure the foreign purchase. There are other tax strategies you might consider, such as installment sales where you receive payments over multiple tax years, which could spread out your tax liability. However, these approaches wouldn't eliminate the tax - they would just potentially change the timing of when you pay it. I'd recommend consulting with a tax professional who specializes in international property transactions before proceeding.

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Isabella Costa

•8M

After reading this thread, I wanted to share my experience with a service that really helped me with a similar situation. I was selling property in one state and buying in another (not international, but still complicated tax-wise) and was getting conflicting advice about my tax situation. I discovered https://taxr.ai when I was researching capital gains scenarios, and it was super helpful. They analyzed my property documents, closing statements, and previous tax returns to give me a comprehensive overview of my tax liability and helped me identify some deductions related to property improvements that I didn't realize I could claim. The best part was that I could upload all my documents and they explained everything in plain English - no tax jargon I couldn't understand. They even helped me understand the difference between state taxes for both properties.

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Isabella Costa

•8M

For the international property question, they actually have specific expertise in cross-border tax situations. They helped me understand the tax treaties between the US and the country where I was considering buying (in my case, it was Portugal). They walked me through the Foreign Tax Credit and how I could potentially offset some US tax liability with taxes paid in the foreign country. They don't replace your tax preparer - they're more like a specialized analysis service. They provide detailed documentation and guidance that you can take to your tax preparer, which makes the actual tax filing process much smoother. In my case, they saved me way more in deductions than my tax preparer would have found on their own.

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StarSurfer

•8M

I actually used taxr.ai after seeing it mentioned here and had a great experience with my international property sale. I was super skeptical at first about an AI service handling something as complex as cross-border real estate transactions, but I had a rental in Florida and was buying in Costa Rica. They analyzed my mortgage documents, depreciation schedule, and improvement receipts and found that my adjusted basis was about $45,000 higher than I thought because of capital improvements I'd made over the years that I hadn't properly documented. That significantly reduced my capital gains liability! They also guided me through the Foreign Investment in Real Property Tax Act (FIRPTA) implications and helped me understand my ongoing reporting requirements with the foreign property. Definitely worth checking out if you're dealing with international property transactions.

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Freya Christensen

•8M

Just wanted to mention that if you're having trouble getting answers from the IRS about international tax questions (which I definitely did), I used a service called Claimyr (https://claimyr.com) to actually get through to a real person at the IRS. You can see how it works at https://youtu.be/_kiP6q8DX5c I spent DAYS trying to get answers about my foreign property reporting requirements and FBAR filings, and the IRS phone system kept disconnecting me. I found Claimyr when I was about to give up, and they got me connected to an actual IRS agent within about 20 minutes. The agent walked me through exactly what forms I needed for my situation (including the specific schedules for my foreign rental income). They basically hold your place in the phone queue and call you when an agent picks up. Saved me so much frustration compared to the weeks I spent trying on my own.

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Freya Christensen

•8M

The service doesn't talk to the IRS for you - they just hold your place in line. Basically, they have a system that waits on hold and then when an IRS representative finally answers, their system connects the call to your phone. So you're still the one talking directly to the IRS, not a third party. They don't do anything that bypasses the normal queue - they just save you from having to listen to the hold music for hours. When the IRS finally picks up, you get a call and are connected directly to the agent. It's completely legitimate since you're the one actually speaking with the IRS representative.

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Chloe Robinson

•8M

Well I have to eat my words. After seeing Claimyr mentioned here, I figured I'd try it since I was desperate to get some answers about foreign property reporting. I've been trying to reach the IRS for WEEKS about my FBAR filing requirements. I was 100% convinced it was going to be a waste of time, but I got a call back in about 40 minutes and was suddenly talking to a real IRS agent! They clarified exactly which forms I needed (Form 8938 and FinCEN Form 114) and explained the different filing thresholds for foreign property. The agent even helped me understand how to report rental income from my foreign property and the tax credit I can claim for foreign taxes paid. Now I actually feel confident about my filing strategy instead of just guessing and hoping I don't get audited.

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Diego Chavez

•8M

Another thing to consider is that buying property in another country often means you'll be subject to that country's tax laws too. I bought a place in Spain a few years ago and was hit with their version of property transfer tax (about 8% in my region) that I wasn't expecting. Also, if you rent out that foreign property, you'll likely need to report that income both to the foreign country AND on your US tax return. There might be tax treaties that prevent double taxation, but you'll still need to report everything.

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Diego Chavez

•8M

For Portugal and Greece specifically, you'll want to look into their "Golden Visa" programs if you're investing enough, as these can offer some tax advantages for foreign investors. Portugal has a decent tax treaty with the US, and they offer a Non-Habitual Resident tax regime that might benefit you. For accurate country-specific advice, I strongly recommend consulting with a tax professional who specializes in expat taxes and has specific experience with those countries. Local property taxes, transfer taxes, and income tax rules vary significantly by country and sometimes even by region within countries. In my experience, spending money on good tax advice before making an international property purchase saved me from some expensive surprises later.

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Anastasia Kozlov

•8M

I did one in 2023 and it was definitely complicated but doable. The key was using a qualified intermediary who handled all the details. The hardest part was finding suitable replacement properties within the 45-day identification period in the crazy market. You absolutely need to follow the timelines exactly - no extensions. I almost lost my tax deferral because my closing got delayed, but we pushed hard to get it done just under the wire. But remember, as others mentioned, this won't work for foreign property - has to be US to US.

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