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Welcome to the Wiesenberg & Co. Certified Public Accountants foreign property owner tax update.

A method exists allowing the owner of a rental villa to sell their original property and purchase another rental property without paying any taxes. This newsletter discusses whether or not non-residents can take advantage of this powerful tax strategy.

The strategy referred to above is called a " 1031 like-kind exchange," named after Internal Revenue Code section 1031. Savvy domestic investors use this tax saving formula extensively. This strategy allows a seller to exchange the proceeds of their sale for a new property. If the new property is of equal or greater value, no immediate tax liability will be triggered.

There are many rules that must be complied with to successfully navigate this "exchange." The substitute property must be identified within 45 days of the original sale, and sold within 180 days of that original date. An entity, often referred as an accommodater, may be appointed to hold the proceeds until it is used for the new purchase. This intermediary can guide the investor through the exact details of the transaction. A partial non-deferral of taxes can occur where the property sold is of greater value than the new property. In this case all proceeds directly utilized for the new purchase will be reinvested tax-free while the excess amount will be taxed.

In most circumstances foreign investors can use this investment method. US tax law in this situation tries to encourage foreign investment, but at the same time keep non-residents on equal footing with residents. Accordingly, non-residents can use this method as long as the following three basic requirements are met. The United States property has to be exchanged for another United States property. The new property has to be taxable on its sale, and the annual tax return has to be filed with form 8224 for the two years following the exchange.

The " 1031 like-kind exchange" is one of many situations where taxes can be deferred. In a unified approach to encouraging foreign investment, the IRS has established similar requirements for many other tax deferral strategies. We will try and address some of the other commonly applicable deferral strategies in upcoming newsletters.

Reminder: The deadline for non-residents to file tax returns is June 15th. Extensions to this filing date can be requested.

Tax tip of the day

If structured correctly charitable contributions can help eliminate a foreign- investors United States tax liability.

Please contact us with any comments or questions you may have.

(This newsletter is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, consult with your professional advisor.)

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