IRS 1031 Exchanges for Costa Rica Real Estate
Many of our clients at Catalina Cove Real Estate are U.S. citizens who are sophisticated investors looking for ways to minimize taxes on gains realized from real estate investments. Although we do not offer tax advice, we can point you in the right direction on these matters. We always recommend that you consult with your tax professional for the best strategies tailored to your specific needs.
One of the common strategies used by our clients is to purchase Costa Rica real estate using self-directed IRA funds. For more information on this technique, see the information presented here: www.catalinacove.net/ira.htm
Some of our clients have been using the IRS 1031 “Like-Kind” Exchange technique to defer taxes on investment properties in the states, and are interested to know if that process can be used for properties in Costa Rica.
What is a 1031 exchange?
Essentially, it is an IRS approved investment technique whereby you trade or exchange your equity in a property for a “like-kind” replacement property and thus avoid or defer a capital gains tax on the profits. It is a somewhat complicated process and you need to work with a “qualified intermediary” who is an expert on the IRA rules.
Back to the basic question:
Can you use the 1031 exchange technique for properties purchased in Costa Rica?
It is our understanding that yes, this tax avoidance technique can be used with foreign properties, but there is an important caveat:
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.).
In other words, you cannot sell a U.S. property and use the 1031 exchange technique to defer the capital gain by purchasing a property in Costa Rica.
However, you can buy a Costa Rica property, and then exchange it for another Costa Rican property later on, and defer the capital gains tax that would otherwise be owed.
One company in the U.S. that specializes in the 1031 exchange program is First American Exchange Company: www.firstexchange.com
Glossary of 1031 Exchange Terms
- Boot: “non like-kind” property i.e. cash, notes from seller financing, furniture, supplies, and reduction in debt obligations
- Disqualified Party: a person who has acted as the taxpayer’s employee, attorney, accountant, investment banker or real estate broker/agent within a two year period and certain relatives
- Exchanger: the principle involved in the tax-deferred exchange who benefits from the exchange i.e. the taxpayer, investor
- Qualified Intermediary: a person who is not an agent of the taxpayer and is a qualified person and enters into a written agreement with the taxpayer, also know as the Accommodator
- Relinquished Property: property held by the taxpayer which is transferred in an exchange.
- Replacement Property: property which will be received by the taxpayer in exchange for the relinquished property
- Simultaneous Exchange: exchange transaction where properties being conveyed and acquired occur at the same time
Author Kevin C. Myers is the Broker of Catalina
Cove Real Estate, located in Flamingo-Brasilito and is part of the Grupo Do It management team, developers of Catalina Cove. He is the best-selling author of the real estate investment book, Buy It, Fix It, Sell It: Profit! published by Dearborn Financial (Chicago) available in bookstores everywhere. For more information, visit the following website: http://www.realestate-profits.com
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