Like-Kind Property Exchange in the US Virgin Islands

The US Virgin Islands are eligible to partake in like-kind property exchanges, making now the perfect time to seize on investment opportunities in the islands. Discover whether a like-kind exchange could help boost your rental or investment property income.

What is a Like-Kind Exchange?

Like-Kind Exchange, 1031 Exchange, and Starker Exchange are all terms for tax-deferred property exchanges under Internal Revenue Code Section 1031.

When you sell your investment property, you are required to pay a capital gains tax on your profits at either a short-term or long-term capital gains rate. But, if you instead reinvest profits from the sale in a like-kind property of the same or greater value, Internal Revenue Code Section 1031 provides for you to defer the tax liability. This opens up a world of possibilities for investors looking to diversify or move markets entirely — including stateside investors seeking opportunities in the the US Virgin Islands.Other advantages to a tax-deferred exchange include:

The potential to increase investment income by moving to more profitable real estate markets.
Property consolidation for those seeking to consolidate multiple investment properties into a single property.
Market diversification for those seeking to convert one investment property into multiple properties across various locations.
Exchanging one type of investment property for another kind of investment property (i.e. land in exchange for a single-family home)

Note that the investor will be required to pay taxes upon sale of the second property. However, if another like-kind exchange is executed, the liability may potentially be deferred again.

Basic Qualifications for a Like-Kind Exchange

Internal Revenue Code Section 1031(a)(1) states: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment.” This indicates any real estate primarily held for investment or held for productive use in a business may be eligible for a like-kind exchange with these basic qualifications:

The new investment property must be of “like-kind” to the property being sold.
A personal residence will not qualify for the exchange, but a vacation home used predominantly as a rental property could qualify.
The like-kind property to be purchased must be identified within 45 days; the purchase must be completed within 180 days after the sale of the original property.
A Qualified Intermediary must ensure that all eligibility requirements are adhered to. For instance, the investor must not have access to funds from the sale during the period of exchange, so a third-party Qualified Intermediary will hold the funds in an interest bearing account.
There are limitations on the amount of capital gain that may be tax deferred. Consult an advisor for more information on this and additional stipulations.

Of course, always consult a tax advisor before making arrangements for a 1031 exchange.

Like-Kind Exchange in the USVI

The USVI is considered a US Property for a 1031 exchange – meaning if you already own investment or rental property, you could be eligible to defer tax and reinvest in a second property of a “like-kind.” So why should that second property be in the US Virgin Islands?

Well, given recent world circumstances, an exceptional demand has risen throughout the US for short-term and long-term home rentals in warm weather locations. People want to venture outdoors — and if there’s one thing we love about the Virgin Islands – it’s the year round gorgeous weather. But even before these recent shifts, the tourism industry in the US Virgin Islands brought in a high rental occupancy. In 2018, Airbnb named St Thomas its top Caribbean destination, taking the 6th spot in Spring bookings with a year-over-year growth of 600%. The following year, growth held strong, St Thomas again taking the 6th spot in Airbnb bookings with year-over-year growth at 338%. Learn why else we love the “Love City.”

Ready to find the perfect investment property? Contact an Islandia Real Estate agent today.