If you are an expat selling your foreign residence, here’s a simple guide with what you need to know about capital gains tax.
Disclaimer: US Expat taxes are complicated. This guide serves only as a general introduction to the tax implications of selling a non-US residence. Before selling any property, we strongly recommend that you receive a consultation from a US Expat Tax professional. Before preparing and filing your taxes, be sure to hire a professional or read all IRS publications and form instructions carefully.
US Expat Taxes and selling a foreign residence – introduction
Generally, for US Citizens and permanent residents, non-US property sale transactions are reported and taxed just as if you were living and/or selling property in the United States.
The taxation of these property sales depend on the character of the property as different types of holdings are taxed differently. Examples of these types of property holdings include the sale of your main residence, a sale of rental property, sale of business property, and sale of investment property. Each specific type of property sale has it’s own reporting rules and each might also have a different tax rate.
Sale of a foreign home that was your main place of residence
As a US person, you must report the sale of your main residence just as if the home was in the United States and just as if you were living in the United States.
When you sell your main home, whether it is located in the US or not, you pay a capital gains tax on any money ultimately realized from the transaction. The amount of gain depends on the cost basis of the property – which can actually get pretty complicated.
To simplify, just understand that the gain is pretty much equal to “whatever you sold it for”, after selling expenses, minus “whatever you paid for it” after buying expenses. You can also include major capital improvements that affected the value of the home in this equation.
Things get much more complicated if you ever rented the property, which we will get into later.
So as a very simple example, let’s say you bought a home for $150,000 US Dollars, spent $20,000 on a new roof, and then sold the house for $400,000. You also had to pay a realtor and title/legal company $25,000 at the sale.
Your total capital gain will be $400,000 – $25,000 – $20,000 – $150,000 which is $205,000.
The tax rate on this sale would depend on for how long you held the property. Capital gains tax on property held for one year or less is taxed at your ordinary income tax rate (which depends on your tax bracket).
Capital gains tax on property held for more than one year is taxed at a lesser rate which also depends on your tax bracket.
Remember that the gain from the sale is added to your income when it comes to figuring out your tax bracket – so you might be in a higher bracket than you think.
As a rule of thumb, long term capital gains rates are 0%, 15%, or 20% depending on your total income for that year, including the gain income, and you filing status.
Most taxpayers fall into the 15% rate. The 0% rate is only for taxpayers that earn very little.
You start getting into the 20% in the $400,000s if you are filing as single, head of household, or married jointly, but if you are married and filing separately, you get into the 20% rate in the $200,000s.
The sale of primary residence exclusion
You may have heard or remembered that as long as you “bought another home” within a certain amount of time then you would not owe any tax on the gain. Well this rule has changed slightly and for a personal property such as your main home, it does not exist anymore.
Instead, policy makers now allow you to exclude 250,000 of the gain when figuring your capital gains tax for the sale of your main home. If you are married, you and your spouse get a $500,000 exclusion.
There are a few technical rules to qualify for this exclusion. The simple version is that you must have lived in your home as a primary residence for the last 2 out of 5 years and you must not have claimed the exclusion within the last two years.
This also assumes that the property was not rented out to others at any time, as that complicated the exclusion rules significantly.
As a final note to the taxation from the sale of your main residence is that you may not claim a capital loss on the sale if you sold it for less than your cost basis.
Sale of your foreign main home and the foreign tax credit
If you pay tax to your country of residence for the sale of your main home, you may be able to claim the foreign tax credit to reduce or even eliminate your US capital gains tax liability.
The foreign tax credit generally prevents a double taxation (a tax liability to more than one country) for this type of gain. This is especially true if your tax liability in your country of residence is greater to than what you would owe to the United States. If you pay less tax in your current country than in the US, you may owe the difference to the US.
Many countries do not tax capital gains or tax them very little, however, and with foreign property sales, it’s common to owe US taxes on the sale. This often surprises many expat filers – so be ready for a possible tax liability on the sale of your foreign property.
The rules for claiming the foreign tax credit for capital gains are quite complicated. We recommend hiring a US Expat Tax professional to help you if you think you might qualify for this credit.