Avoiding capital gains on foreign property

Dear Tax Talk,
I am a U.S. citizen and am in the process of selling a piece of property I currently own in Belize. I then plan to turn around and purchase new property in Belize with at least half of those proceeds. How will I pay capital gains on this? Will I only owe on the part that I keep or will I owe on all of it?
— Lola

Dear Lola,
As a U.S. citizen, you have to pay income taxes on your worldwide income. Generally the only way to avoid recognizing gain is to reinvest the proceeds from a sale in like-kind property.

Selling a property in Belize is the same for income tax purposes as if the property were in the U.S. You need to convert the transaction to U.S. dollars at the time of purchase and sale and report it on a Schedule D.

The transaction is converted to U.S. dollars by using the prevailing exchange rate for the local currency at the time of acquisition and sale. If the transaction results in a loss, the loss is deductible only if the property was held for investment or used in a business.

Similarly, like-kind exchanges only apply to investment or business-use property. The exchange of foreign property for foreign property can qualify as a like-kind exchange if all the other rules of exchanging property are met. Foreign property exchanged for U.S. real property or vice versa is not considered like-kind property.

In a like-kind exchange, you still measure gain based on the value of the property received compared with the cost of the property relinquished. Cash you keep in the exchange is called boot. You recognize gain to the extent of the lesser of the gain, or boot, received in the exchange. In other words, reinvesting half of the proceeds does not mean you will avoid recognizing half of the gain.

For example, if you bought the property for $60,000 and sell it in the exchange for $100,000, your gain is $40,000. If you keep $50,000 in cash, you will recognize the full $40,000 in gain. If you keep $30,000 in cash, then your gain is limited to $30,000.

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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.