According to Treasury Regulation §1.1031(h), foreign real property and real property situated in the United States are not considered like-kind for the purposes of a 1031 exchange. This means that if you exchange foreign property for U.S. property or vice versa, you will not qualify for tax deferral.

However, foreign real property can be exchanged for other foreign real property, and any gain may be deferred under Section 1031. This provision is particularly important if the foreign country where the relinquished property is located does not tax the gain. As U.S. citizens and permanent residents are taxed on their worldwide income, regardless of their tax residency, if the foreign country does not tax the gain on the sale of the property, there will be no foreign tax credit to offset against U.S. capital gains tax. In this case, only an exchange will eliminate U.S. tax in the year of the transaction.

It is important to note that real property situated in the U.S. Virgin Islands is considered property situated in the United States for the purposes of Section 1031, as confirmed by Private Letter Ruling 9038030.