If you are a U.S. Citizen, Green Card holder, or U.S. Tax Resident and you've sold investment or business property in India, you may have to pay capital gains tax in the United States, even though the property is located overseas.

This blog explains how U.S. tax laws apply to the sale of Indian property and when, if at all, you can defer U.S. tax using Section 1031 Like-Kind Exchange, based on official IRS guidance (Fact Sheet FS-2008-18).

---

What Is a Section 1031 Like-Kind Exchange?

Under Section 1031 of the Internal Revenue Code (IRC), U.S. taxpayers can defer capital gains tax when they sell one investment or business-use property and reinvest in another qualifying “like-kind” property.

This is a deferral, not an exemption. The gain is not taxed immediately but will be taxed when the replacement property is eventually sold in a non-1031 transaction.

---

Who Is Eligible for a 1031 Exchange?

The following types of U.S. taxpayers can potentially use Section 1031:

• U.S. Citizens and Green Card holders

• C Corporations and S Corporations

• Partnerships and LLCs

• Trusts and Estates

• Any U.S. tax resident holding real estate for investment or business use

---

Key Rule: U.S. and Foreign Properties Are Not Like-Kind

According to the IRS:

• U.S. property is NOT like-kind to foreign property

• You cannot exchange Indian property for U.S. property under Section 1031

• Both the old and new properties must be within the United States, or within the same foreign country, for the exchange to qualify

So, if you're selling a property in India and reinvesting in the U.S., 1031 exchange does not apply.

---

What Qualifies as Like-Kind Property?

The IRS defines "like-kind" broadly within the category of real estate, but with important limits:

Qualifies:

• Rental property for raw land

• Commercial building for an apartment

• Vacant land for an office space

Does NOT qualify:

• Primary residence or second/vacation home

• Property for personal use

• Foreign property exchanged for U.S. property

Only property held for business or investment purposes is eligible.

---

Three Types of IRS-Approved Exchanges

1. Simultaneous Exchange
   Sale and purchase occur on the same day (rarely used today)

2. Deferred Exchange
   Most common structure:

   • 45 days to identify replacement property

   • 180 days to complete purchase

   • Identification must be in writing with full address or legal description

3. Reverse Exchange
   Buy the replacement property first, then sell the old one within 180 days. A qualified intermediary (Exchange Accommodation Titleholder) must hold title temporarily.

Missing any of these deadlines means you lose eligibility for deferral, and the entire gain becomes taxable in the year of sale.

---

How Is Gain Calculated and Deferred?

In a valid 1031 exchange:

• You transfer your original cost basis from the sold property to the new one

• The gain is deferred, not eliminated

• The transaction must be reported on IRS Form 8824

When the new property is eventually sold (outside of another 1031 exchange), all deferred gains and new gains become taxable.

---

IRS Compliance Requirements

To stay compliant, ensure the following:

• Use a Qualified Intermediary (QI) — you cannot hold the sale proceeds yourself

• Your agent (CPA, attorney, broker) cannot act as your intermediary

• Carefully document dates, parties, identification, and purchase

You must report the transaction using Form 8824 with your U.S. tax return, disclosing:

• Property details

• Dates of identification and acquisition

• Gain realized and deferred

• Relationships between parties

• Adjusted cost basis carried over

Failure to file Form 8824 or meet IRS requirements can trigger immediate taxation of the gain.

---

Common Pitfalls to Avoid

The IRS frequently flags these errors:

• Attempting to exchange vacation homes or personal residences

• Treating 1031 as a tax-free exchange (it's tax-deferred)

• Receiving cash or non-like-kind assets in the transaction

• Attempting a foreign-to-U.S. exchange (disallowed)

---

Selling Indian Property? What You Need to Know

If you're a U.S. tax resident selling Indian real estate, remember:

• You must report the sale and gain in the U.S.

• You cannot defer U.S. capital gains using a 1031 exchange if you're buying property in the U.S.

• However, if you're selling and reinvesting within India or another foreign country, and meet all requirements, a 1031 exchange might be possible (though rare)

---

How India for NRI Can Help

At India for NRI, we assist U.S.-based NRIs in:

• Reporting the sale of property in India on U.S. tax returns

• Evaluating eligibility for Section 1031 treatment (foreign-to-foreign)

• Filing Form 8824 and other compliance documentation

• Applying Foreign Tax Credit for taxes paid in India

• Minimizing overall tax exposure across India and the U.S.

• Coordinating with CPAs, Indian tax experts, and real estate advisors