Q. I'd like to sell a property and buy another in a foreign country. Is it possible to use a 1031 exchange to avoid paying capital gains taxes on the sale?

— D. Carmody, Honolulu

A. It appears you can do what you are proposing only in very specific circumstances.

For folks who aren't familiar with 1031 exchanges, they generally can be described as a vehicle that allows people to defer paying taxes on investment properties when they buy a property that's similar in use to the one they're selling.

If you have access to the Internet, visit www.IRS.gov and search for Publication 544, "Sales and Other Dispositions of Assets." Click on the section dealing with nontaxable exchanges to get a fuller description of what's allowed and disallowed.

I checked with Jon Anderton, a Princeville-based certified public accountant who specializes in 1031 exchanges with his Exchange Accommodators service. He said selling a domestic property and buying a property in a foreign country generally doesn't qualify for 1031 exchange treatment.

There is one instance he knew of where you are allowed to do this, provided your purchase is income-producing real estate in the U.S. Virgin Islands.

Anderton said this was contained in a tax ruling several years ago and was specific in what it allowed. It didn't extend the purchases to other U.S. territories such as Guam or American Samoa.

IRS Publication 544 spells out another instance where foreign property buys like this are allowed, though again it involves a very narrow application. It says you can do the exchange involving a foreign property provided you are replacing U.S. property that's been condemned.

Anderton said there may be some other options for you that don't involve buying the foreign property directly. He recommends checking your options with a 1031 Exchange expert or your financial adviser to discuss these.

Individual tax situations vary, so it's always a good idea to consult on these questions with a certified public accountant or other professional.

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Do you have a question about personal finance, taxes or other money matters? Reach Akamai Money columnist Greg Wiles at 525-8088 or gwiles@honoluluadvertiser.com