International sale to 1031 exchange back to America

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International sale to 1031 exchange back to America

Jeff Piscioniere
Investor · Shelton, CT · Member since 2016 · 218 posts · 225 votes

I'm honestly not sure what forum category to post this so I will start here, and thank you in advance for any directioning and assistance. 

My wife's childhood home in the Philippines is now in her name and it is sitting idle there doing nothing.  Her cousin who is successful there including in real estate was explaining that there is a possible great opportunity with the property.  In a nutshell it will be worth knocking down the home and rebuilding possible multiple residential properties including more floors.  Bottom line it could be a huge return.  My wife and I have no interest in holding real estate in the Philippines and the thought is to build then sell and if possible complete a 1031 exchange back to America where we would like to further pursue our very successful business of vacation rentals in Gatlinburg, TN, or really elsewhere I suppose where in the US doesn't matter.  My question is whether it is possible to complete a 1031 exchange from international capital gains, what the tax exposure is, and whether or not where a property in the US is purchased matters, i.e. TN or in CT where we live?

Again thank you greatly!

Jeff Piscioniere

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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
9y

Foreign to US does not qualifiy. You can only do US to US or foreign country to foreign country.

You would have to outright sell it. I would take the time to build it, get it occupied for several years and then look at selling. You can't do a 1031 on property you just developed either.

[email protected]224-381-2660
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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    9y

    Foreign to US does not qualifiy. You can only do US to US or foreign country to foreign country.

    You would have to outright sell it. I would take the time to build it, get it occupied for several years and then look at selling. You can't do a 1031 on property you just developed either.

    [email protected]224-381-2660
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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    Hi Jeff,

    @Steven Hamilton II is right on the money.  You can sell and 1031 Exchange foreign investment property for other foreign investment property, but you can NOT sell and 1031 Exchange foreign investment property for U.S. (domestic) investment property.  Your 1031 Exchange must be all non-domestic investment property OR all domestic investment property.  

    Steve also hit the nail on the head regarding development.  You must have the intent to hold fro rental, investment or business use property.  Property acquired (inherited) and then held for development and sale would not qualify. 

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
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  • Jeff Piscioniere
    OP
    Investor · Shelton, CT · Member since 2016 · 218 posts · 225 votes
    9y
    Thank you Steven Hamilton II and Bill Exeter Do you gentlemen have any idea on what tax exposure is then following a sale of international property? Thank you!
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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    9y

    Typical capital gain and recapture situation.   If it was not an investment property you are just looking at capital gain.

    [email protected]224-381-2660
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  • Andrew Ware
    Gardiner, ME · Member since 2015 · 190 posts · 177 votes
    9y
    The ROI on something like this can be really good. But you have to have someone you can really trust supervising and watching the till. If you think contractors in the US can be problematic, they are amateurs. We spent more than three times the estimate on a raised room and it still wasn't connected to the inside of the apartment! Meaning they were supposed to build an addition, blow out a wall, and put stairs in. We built it for safety from flooding, but you had to go *outside* and up stairs to get to that room (which by the way is exactly what you want to do during a typhoon). Awesome! It actually wasn't our building and the landlord treated us really pretty well. Otherwise we would have fired him with the quickness. It was a nephew or cousin of the landlord and he basically didn't know what he was doing when he made the estimates. And who knows if there was a little extra put in his pockets or the local politicians. My point is that the landlord is the one who really didn't profit, we really just financed it. So if there were any shenanigans it was her relative causing it. I'm not trying to discourage you. There are great returns there. But you absolutely have to have a really trustworthy person on site with goals that line up with yours. They still might take a smidge more than their agreed upon share.
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  • Jeff Piscioniere
    OP
    Investor · Shelton, CT · Member since 2016 · 218 posts · 225 votes
    9y
    Andrew Ware thanks for the input. We are lucky because our on hand partner will be one of my wife's cousins. So it sounds like you've done deals in the Philippines before? Are there any issues working with the Filipino legal/real estate system that we should be prepared for? Thanks, Jeff
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  • Andrew Ware
    Gardiner, ME · Member since 2015 · 190 posts · 177 votes
    9y
    I don't want to overstate my experience in the Philippines. We mostly did loans and we built that room for my wife on an apartment we didn't own. Her cousin sounds like he knows a great deal more than I do. The major legal hurdle sounds like it's covered in that a Philippines citizen or corporation must own at least 60%. Of course, there are permits you need but those aren't major. And there may be extra taxes that aren't written into law that have to be paid. It's tough for me to swallow, but it's just how business is done. We never dealt with normal buying and selling. We were in the province and the best I could gather it mostly works through networking. If someone is looking to rent or buy then you know someone who knows someone. That shared network is far larger than an American could typically understand. The main thing I wanted to impress upon you is that Filipinos don't like confrontation. The answer will always be yes. It can be an utter disaster and you will just hear "yes boss!" You have to have people who already have experience with the exact thing they are doing. They will not tell you they have never done it. This possibly includes the cousin. If he has never done a project like this then run away. Even relatives don't guarantee trustworthiness. I hope that nothing I've said sounds racist, because that's not what I'm saying at all. We have plenty of con artists here in America. And a lot of the expats there are... I'm trying to think of a nicer way to say dirtbags. Filipinos are warm generous people and they are tough businessmen. But there are major cultural differences between what is acceptable. There is a pervasive attitude of you let me get away with it so it's your fault. Here we would be talking to the police and taking them to the court. It's a workable system if you understand it, but if you don't they will eat you for lunch. This article is actually pretty consistent with my experience. http://haraldbaldr.com/how-to-invest-abroad-build-a-house-in-the-philippines-for-us-25k/
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  • Lynne HartBusiness Member
    Real Estate Agent · Saint Louis, MO · Member since 2015 · 115 posts · 49 votes
    9y

    I can't speak to the 1031 in detail, and if I were in the same situation I'd definitely consult an international tax accountant.  If you end up transferring funds across borders/currencies I can recommend you to a transfer service that can typically save clients 3-10% in the transfer process, sometimes more depending on the currencies involved.  If that is of interest please let me know privately how to contact you and I will make the connection.    I'm an international real estate agent and they've done some great stuff for my clients buying/selling in other currencies.

    InveSTLouis at Real Broker LLC54 Reviews
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  • Jeff Piscioniere
    OP
    Investor · Shelton, CT · Member since 2016 · 218 posts · 225 votes
    9y
    Thank you Lynne Hart Herrera !
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