Can I do a 1031 Exchange into Puerto Rico?

A 1031 exchange, also known as a “like-kind” exchange, is a tax-deferred transaction that allows investors to sell one property and purchase another without paying capital gains tax on the sale of the first property. This type of exchange can be a useful tool for investors looking to relocate their investments. However, there are certain rules and guidelines that must be followed to qualify for the tax deferral.

It should be noted that U.S. real estate is only “like-kind” to U.S. real estate, and international real estate is only “like kind” to international real estate. Therefore, under Section 1031, international real estate cannot be exchanged for U.S. real estate and vice-versa. “U.S. Real Estate” refers to property within the Continental U.S., including “coordinated” U.S. Territories. Guam and the U.S. Virgin Islands are considered U.S. real estate, but not Puerto Rico.

Unfortunately for U.S. real estate investors looking to acquire island vacation investment property, real estate in Puerto Rico is currently not an option under Section 1031, unless both the relinquished and replacement properties are foreign real estate. In which case, if a U.S. taxpayer is selling international real estate, then real estate in Puerto Rico may be an option.

Before attempting a 1031 exchange involving Puerto Rico, please consult with your real estate attorney and accountant. They are best informed of current rules and regulations. If you do not have a lawyer or accountant in Puerto Rico, we can recommend a few for you.