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.