I'm selling a residential rental property in UK and want to purchase a residential rental property in the US, can the 1031 Exchange be applied?

[Coleen3 · Accepted solution]

Unfortunately, no.

What property qualifies for a Like-Kind Exchange?

Both the relinquished property you sell and the replacement property you buy must meet certain requirements. 

Both properties must be held for use in a trade or business or for investment.   Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

Both properties must be similar enough to qualify as "like-kind."  Like-kind property is property of the same nature, character or class.  Quality or grade does not matter. Most real estate will be like-kind to other real estate.  For example, real property that is improved with a residential rental house is like-kind to vacant land.  One exception for real estate is that property within the United States is not like-kind to property outside of the United States.  Also, improvements that are conveyed without land are not of like kind to land.

From <https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031> 

[simplemind100]

Thanks. Not 100% clear. The property in the U.K. Is held for investment and business rental. There is income from this and therefore it is business, no ? It is a 4 bedroom semi detached house. The property I would look to buy in the USA is a 4 bedroom house as well which would be used for investment and rental.  So, would this not be classed like for like ? The US purchase would not be for personal use. It would be for rental and as an investment.

[Coleen3]

Yes, if both properties were in the US, then it would qualify. Please see the bolded next to last statement.

[simplemind100]

Clear thanks. Can I check re CGT re this property in U.K. We have not lived in it for last 5 years but had it rented. We have owned property for 20 years. Can we claim CGT partial exclusion based on business rental. The non qualified use period would be Feb 13 to Feb 18, so 60 months. The ownership would be 240months. Is that possible ?

[Coleen3]

The exclusion for the sale of a personal primary home state:
 How your sale qualifies.   
Your sale qualifies for exclusion of $250,000 gain ($500,000 if married filing jointly) if all of the following requirements are met.
• You owned the home and used it as your main home during at least 2 of the last 5 years before the date of sale.
• You didn’t acquire the home through a like-kind exchange (also known as a 1031 exchange), during the past 5 years.
You didn’t claim any exclusion for the sale of a home that occurred during a 2-year period ending on the date of the sale of the home, the gain from which you now want to exclude.

[simplemind100]

Would the home not be classed as a business investment property instead of a personal primary home ? It can't be a personal primary home if we have not lived in it for the last 5 years. But it has been rented so is an investment, would that be correct ? Be great if you could help clarify this pls - we are really not sure on this one

[Coleen3]

It is a business property. You will have to pay tax on any gain as well as recapture depreciation. CG apart from depreciation is taxed at Capital Gains rates. The depreciation is taxed as ordinary income.

[simplemind100]

Really appreciate advice, many thanks!

[Coleen3]

My pleasure