If you're a U.S. Citizen, Green Card holder, or U.S. Tax Resident and have sold investment or business property in India, you may be subject to capital gains tax in the United States, even though the asset was located abroad.

While Section 1031 of the Internal Revenue Code (IRC) provides an option to defer U.S. capital gains taxes, it comes with very specific limitations — especially for foreign real estate.

This blog summarizes the official IRS Fact Sheet FS-2008-18, outlining how Section 1031 Like-Kind Exchange applies (and doesn’t apply) when you're dealing with sale of Indian property as a U.S. taxpayer.

What Is a Like-Kind Exchange Under IRC Section 1031?

Typically, when you sell an investment property, the capital gains are immediately taxable. However, under Section 1031, if you reinvest the proceeds into a similar qualifying property, you can defer the taxes until a later sale.

But remember:
This is a tax deferral—not a tax exemption.

Eventually, the deferred gain will be taxed unless another 1031 exchange is carried out again in the future.

Who Can Use Section 1031?

The following U.S. taxpayers/entities are eligible for a 1031 like-kind exchange:

• U.S. Citizens
• Green Card Holders
• C Corporations
• S Corporations
• Partnerships and LLCs
• Trusts and estates
• Any U.S. tax-paying entity holding investment or business-use property

Important: U.S. Property Is NOT Like-Kind to Foreign Property

Under IRS regulations, U.S. real estate is not considered like-kind to property located outside the United States.

That means:

• Real estate in India cannot be exchanged for U.S. real estate under Section 1031.
• Both the relinquished property and the replacement property must be located within the United States (or both within the same foreign country) to qualify for like-kind exchange treatment.

If you've sold a property in India and are purchasing a new property in the U.S., you cannot use Section 1031 to defer tax in the U.S.

What Qualifies as Like-Kind Property?

The IRS uses a broad definition for "like-kind" in real estate, but with restrictions:

Qualifying Examples:

• Rental apartment exchanged for raw land
• Commercial building exchanged for a rental property
• Vacant investment land exchanged for an office space

Non-Qualifying Examples:

• Primary residences or second homes
• Personal-use vacation properties
• Foreign property exchanged for U.S. property

Only real estate held for investment or business use qualifies.

Deferred and Reverse Exchanges: IRS-Approved Structures

There are three primary types of 1031 exchanges recognized by the IRS:

Simultaneous Exchange

• Both properties are exchanged on the same day — rare in practice.

Deferred Exchange (Most Common)

• 45 days to identify potential replacement property
• 180 days to complete the purchase
• Identification must be in writing, with legal description or full address

Reverse Exchange

• You acquire the replacement property first and sell the relinquished property within 180 days. It must be held by an Exchange Accommodation Titleholder in the interim.

Missing these deadlines results in full immediate taxation on the capital gain.

How Is Gain Calculated in a Section 1031 Exchange?

Section 1031 allows you to:

• Transfer your cost basis from the sold property to the new one
• Defer recognition of capital gain
• Report the transaction using IRS Form 8824

Eventually, when the replacement property is sold in a non-1031 transaction, the deferred gain becomes taxable, along with any appreciation in the new property.

IRS Rules You Must Follow

To stay compliant with IRS Section 1031 guidelines, ensure:

• You do not take possession of sale proceeds; use a Qualified Intermediary
• You or your agent (CPA, attorney, broker) cannot serve as the facilitator
• Choose a reliable intermediary — IRS warns of fraud, bankruptcy, or mismanagement

Reporting a Section 1031 Exchange

You must file Form 8824 – Like-Kind Exchanges with your U.S. tax return.

This includes:

• Property descriptions
• Dates of identification and acquisition
• Gain realized and deferred
• Parties involved and relationships
• Adjusted cost basis

Failure to comply may lead to full gain being taxed in the year of the transaction.

Beware of Common Pitfalls in 1031 Exchanges

The IRS has flagged common mistakes:

• Exchanging vacation homes or personal-use properties
• Referring to 1031 as a “tax-free exchange” instead of “tax-deferred”
• Receiving cash or non-like-kind assets as part of the transaction

Conclusion: Selling Indian Property? Understand Your U.S. Tax Exposure

For U.S. Citizens, Green Card holders, and U.S. tax residents, selling real estate in India is not eligible for 1031 exchange if reinvested in U.S. property.

However, if you're exchanging foreign property for other qualifying foreign real estate (and meeting all IRS conditions), a 1031 exchange may still apply.

Be cautious, and always consult a U.S.-India cross-border tax advisor.

Need Help with Reporting Sale of Indian Property in the U.S.?

At Dinesh Aarjav & Associates, we help U.S. taxpayers with:

• U.S. tax reporting for NRI sale of property in india
• Determining eligibility for Section 1031
• Filing Form 8824 and related disclosures
• Reducing exposure to capital gains tax
• Navigating cross-border compliance for NRIs and U.S. tax residents