Q: My sister and I inherited a house in the U.S. in 1995, which we sold at the end of April, 2006.
We are both U.S. citizens, but I live in Scotland. With my share of the proceeds, I am in the process of buying a property for rental here in Scotland, where I live.
Can I use a 1031 tax free exchange to defer any capital gains on my share of the proceeds? The offer has been accepted, which is binding in law here in Scotland, but the money hasn’t changed hands yet.
A: Unfortunately, I think you’re out of luck. According to current IRS law, 1031 tax-free exchanges may not be used to purchase property outside of the U.S. But even if you could buy a rental property overseas, you’d be out of luck a second time. Current 1031 exchange rules require you to have designated a replacement property within 45 days of closing on your original property and then to close on the new property within 180 days. These dates are not flexible in any way. Since you cannot qualify for a 1031 tax free exchange, you should plan to pay capital gains taxes by next April 15th. Please talk to a tax advisor who is understands what you might owe given where you live.
August 28, 2006