Can You Use a 1031 Exchange to Buy in Los Cabos?

Can You Use a 1031 Exchange to Buy in Los Cabos?

Karla & Erick | Cabo Realty | Century 21 Paradise Properties

Can you use a 1031 exchange to buy property in Los Cabos? Not with U.S. property. Section 1031(h) of the U.S. Internal Revenue Code says that real property in the United States and real property outside the United States are not “like-kind.” So if you sell a rental in California, Texas or Arizona, you cannot defer that gain by buying a home in Cabo. There is one exception that many investors don’t know: you can exchange foreign investment property for other foreign investment property, for example one Los Cabos rental for another. Here is how it works, in plain English.

✅ What You Can and Can’t Do

Rule: 26 U.S. Code § 1031(a)(1) and (h).

🔄 The Exception: Foreign for Foreign

If you already own investment property outside the United States, you can sell it and buy another foreign investment property without paying U.S. tax on the gain right away. Owners of a Cabo rental can use this to move, for example, from a condo in one neighborhood to a home in another. The usual 1031 rules still apply:

• 45 days after you sell, you must identify in writing the property you will buy.
• 180 days after you sell (or your tax return due date, if earlier), you must close on it.
• Both properties must be held for investment or rental, not as a personal home.
• U.S. exchanges are normally done through a qualified intermediary, who holds the sale money so you never touch it. Ask your CPA how this works with a sale and purchase in Mexico.

Remember: a 1031 only defers U.S. tax. Mexico taxes the sale of property in Mexico on its own rules. See Do I Pay Taxes in the U.S. if I Sell My House in Mexico?

🏦 Does the Fideicomiso Change Anything?

Foreigners buy beachfront property in Los Cabos through a bank trust called a fideicomiso. In Revenue Ruling 2013-14 (June 2013), the IRS concluded that a typical Mexican fideicomiso is not treated as a trust for U.S. income tax purposes: the American buyer is treated as the owner of the property, and the arrangement does not trigger foreign trust reporting on Forms 3520 or 3520-A. The ruling covers fideicomisos where the bank only holds title to the property, so have yours reviewed. Learn more in What Is the Fideicomiso and What Protection Does It Offer?

🏖️ What About a Vacation Home?

A home you only use yourself does not qualify for a 1031. The IRS gives a safe harbor for vacation homes in Revenue Procedure 2008-16. In each of the two years before an exchange (for the home you sell) or after it (for the home you buy), you must:

• Own the property for at least 24 months.
• Rent it at a fair market rent for at least 14 days each year.
• Use it yourself no more than 14 days a year, or 10% of the days it is rented, whichever is more.

If you plan to rent your Cabo home, read Short-Term or Long-Term Rentals in Los Cabos and Legal Requirements for Renting Out Your Property in Los Cabos.

💵 What U.S. Buyers Actually Do

Since a 1031 from the U.S. is not possible, buyers selling property at home usually take one of these paths. Which one is right depends on your taxes, so talk to your CPA before you sell:

• Sell, pay the U.S. tax and buy in cash. In the MLS, about 71% of Los Cabos sales from July 2025 to October 2026 were paid in cash, and 79% of sales of $1M USD or more.
• Keep the U.S. property and buy in Cabo with other savings, so no U.S. sale is triggered.
• Finance part of the purchase. Some buyers use developer or seller financing in Los Cabos; see Foreigners and Mortgages: Buying Property in Mexico.
• Already own a Cabo rental? The foreign-for-foreign exchange above can let you trade up inside Los Cabos.

Once you own, plan for yearly costs too: Property Taxes and Fees in Los Cabos.

❓ FAQ – 1031 Exchange and Los Cabos

Can I do a 1031 exchange from the U.S. to Mexico?

No. Under Section 1031(h) of the Internal Revenue Code, real property in the United States and real property outside the United States are not like-kind, so they cannot be exchanged tax-deferred.

Can I do a 1031 exchange between two properties in Mexico?

Yes, if both are held for investment or rental. Foreign property can be exchanged for other foreign property, following the usual 45-day and 180-day deadlines.

Can I exchange my Cabo rental for a property in the U.S.?

No. The same rule works both ways: foreign property cannot be exchanged for U.S. property under a 1031.

Does a 1031 exchange avoid Mexican taxes?

No. A 1031 exchange only defers U.S. federal tax. Mexico taxes the sale of property in Mexico under its own rules.

Is a fideicomiso a trust for U.S. taxes?

In Revenue Ruling 2013-14, the IRS said a typical Mexican fideicomiso is not treated as a trust for U.S. income tax purposes; the buyer is treated as the owner of the property.

Can I use a 1031 exchange for a vacation home in Cabo?

Only if it qualifies as investment property. The IRS safe harbor in Revenue Procedure 2008-16 requires owning it 24 months, renting it at least 14 days a year and limiting personal use to 14 days or 10% of rental days.

Sources: 26 U.S. Code § 1031 (a)(1), (a)(3) and (h), Cornell Law School Legal Information Institute; IRS Revenue Ruling 2013-14 (June 2013), as summarized by the National Law Review; IRS Revenue Procedure 2008-16; MLS (Flexmls) closed sales in Los Cabos with financing recorded, July 2025 – October 2026. Information verified November 2026.

Disclaimer: This is general information, not tax or legal advice. Tax rules change and every situation is different; talk to a U.S. CPA or tax attorney and a Mexican notary or tax advisor before you sell or buy. Karla & Erick | Cabo Realty are MLS members and operate under the brokerage Century 21 Paradise Properties.

Karla & Erick | Cabo Realty | Century 21 Paradise Properties