As a US Expat are you planning to sell your overseas property and feeling overwhelmed by the complexities involved? This guide is here to help! In this article, we’ll walk you through the key aspects of selling a foreign property, including the legal requirements, tax implications for US taxpayers, and important considerations for foreign taxes.
Selling property abroad comes with its own set of challenges, such as navigating unfamiliar legal systems and managing extensive paperwork. But don’t worry — we’re here to make the process less intimidating. Let’s begin by exploring the concept of capital gains, a critical factor for US expats selling any type of foreign property.
Capital Gains: Understanding the Basics
What Are Capital Gains?
Capital gains represent the profit earned from the sale or disposition of a capital asset, such as real estate. To calculate your capital gain, you subtract the property’s original value (its “basis”) from its selling price.
Formula:
Selling Price – Basis = Capital Gain
Your basis typically includes the purchase price and the cost of any significant improvements made to the property (e.g., replacing the roof, upgrading windows, or installing an air conditioning system). However, determining the basis differs for gifted or inherited properties, which we’ll cover later.
Factors Influencing Capital Gains Tax Calculations
The amount of tax owed on capital gains depends on several factors:
- The size of the capital gain.
- Your tax filing status.
- The classification of the gain:
- Short-term capital gains (property held for less than a year).
- Long-term capital gains (property held for a year or more).
For long-term capital gains, the tax rate you pay depends on your filing status and income level:
If you’re filing as a single individual: You pay no tax on long-term capital gains if your total income is $47,025 or less. For income between $47,026 and $518,900, the tax rate is 15%. If your income exceeds $518,900, the tax rate rises to 20%.
If you’re married and filing jointly: You pay no tax if your combined income is $94,050 or less. For income between $94,051 and $583,750, the rate is 15%. If your combined income is above $583,750, the tax rate is 20%.
If you’re married but filing separately: You pay no tax if your income is $47,025 or less. The 15% rate applies to income between $47,026 and $291,850, and the 20% rate applies to income above $291,850.
If you qualify as a head of household, you pay no tax if your income is $63,000 or less. For income between $63,001 and $551,350, the rate is 15%. If your income exceeds $551,350, the rate is 20%.
For short-term capital gains (property held for less than a year), the tax rate matches your ordinary income tax rate, which can range from 10% to 37%, depending on your total income and filing status.
Long-term capital gains taxes, 2025:
How selling a house you were given affects your taxes
If someone gives you a house for nothing or for less than its fair value, the IRS says that the house is a gift. Expats may want to sell a home that was given to them. But there are tax effects to selling a gift property that you should carefully think through so that you can make the most money from the sale.
A “carryover” basis lets you use the donor’s original basis to figure out the new value of a home that was given to you. This means that if you sell the property, you will use the original basis to figure out how much of a gain or loss you are taxed on. It’s possible that this is less than the fair market value (FMV). This can mean a bigger financial gain and maybe even more capital gains tax to pay than if the property was given.
Also, if you sell a house that was given to you, you’ll usually have to pay capital gains tax on the money you make. You can look at the table above again to see when you have to pay capital gain tax.
Take a look at some tax forms that you may need to fill out after you sell the house that was given to you.
A person needs to figure out their capital gains and the capital gains tax that goes with them for two different things. For starters, you can sell a house that you got as an inheritance from someone who has died. Second is selling a house that was given to you.
There is, however, a big difference between selling a home that was given to you and selling a foreign property that you received. The property’s “basis value” tells you how much of a gain or loss you have to pay taxes on when you sell it.
You usually “step up” the basic value of foreign property that you receive to its fair market value (FMV) at the time of the death of the person who owned it. In other words, you change the property’s base to its FMV.
In terms of math, we can figure out how much the capital gain on an acquired foreign property will be by doing the following:
Capital gain = sales price – fair market value at the time of death
As an expat, you will need to think about how to best follow foreign tax rules when you sell a house you received. A lot of expats find it helpful to work with a tax expert, an experienced international tax lawyer, and/or an international estate manager.
Tax effecting buying and selling of real estate abroad with examples
Example 1: Selling a main home.
You can get a capital gains tax exemption if the house was your main home and you lived there for 24 of the last 60 months. In Section 121, the IRS says that you don’t have to pay taxes on capital gains of up to $250,000. This goes up to $500,000 if you are married and make a joint tax return.
Let’s say you’re from the US and have lived in an Icelandic home you bought in 2019 for the past three years. This restriction can apply to you if this home is your main home and you have lived there for at least two of the last five years. You would have made $150,000 in capital gains if you bought the house for $300,000 and then sold it for $450,000. You wouldn’t mention the sale of your home on your US tax return because this profit is less than the capital gains limit.
If you don’t meet the 24/60 month rule, there are some ways you can still get the capital gains deduction (or at least some of it).
No matter what caused you to have to sell your home, you might still be able to get a partial or full exclusion. A breakup, a change in work, or a change in health are all examples of unplanned events.
Example 2: Getting rid of a rental home
The IRS calls this a short-term capital gain if you owned the land for less than a year. Fill out Section I of Schedule D to report this. If you have ordinary income, like wage or interest income, the IRS will tax you at the same rate that other people with regular income pay.
There are some differences in how to handle capital gains on leased homes that have been owned for more than a year. To find out how much tax you have to pay when you sell a rental property, you must:
- Find out what your cost basis is. This includes the buying price, any closing costs (like title and escrow fees), and any changes or repairs that were made.
- Take into account the depreciation that you reported (or should have reported) on all of your tax forms while you owned the property.
Note that these numbers are what the government uses to figure out how much your property is worth.
Next, take the money from the sale and remove the tax base. When you add up the numbers, if the result is positive, it means that the sale made you money. In this case, you might have to pay US capital gains tax. If you did this, you would be taxed on both the amount you made from the sale and the amount of the home’s value going down. A “depreciation recapture” is the name for this.
If the number is less than zero, you lost money. You wouldn’t have to pay any capital gains tax because you lost money on the sale. You might be able to use your loss to lower the amount of income you report on your tax return.
3. Selling a different kind of property
Of course, you can own property in other ways besides a home for your own use or as a rental, like as a holiday home or a business property.
You might have to pay long-term capital gains tax if you owned a home for more than a year, but it wasn’t your main home and you didn’t rent it out. This is between 0% and 20%. When you sell the property for less than it’s worth, however, you can get a tax break. This is only possible if the property was a cash asset and not a personal use asset like a holiday home.
How to report the sale of property in another country
How you tell the US about the sale of your home varies on where it is and what country it is in. Another thing to think about is whether the sale money was put into a US bank account. If you got money from the sale of your house in a foreign currency, for example, you would have to use the foreign exchange rates for the different dates (like the date you bought the house, the date you fixed it up, and the date you sold it) and report it on your tax return in US dollars.
Tax forms for selling a property in another country
If someone gives you a house, you might need to fill out tax forms.
FBAR
Foreign Bank Account Report is what FBAR stands for. Anyone from the United States, even expats, who has at least $10,000 in a foreign bank account needs to file FinCEN Form 114 to meet with FBAR. It’s important to remember that you need to file an FBAR whenever the total sum of all your foreign accounts goes over $10,000, which can happen at any time during the year.
You may need to file an FBAR if you put the money from the sale of a gift property in a foreign bank account.
Form 8949
If you sell a house, whether it was a gift or not, you need to fill out Form 8949 (2) and report any capital gains.
Part D of Schedule
This is where you list all of your cash earnings on Form 8949. Expats will always have to think about foreign taxes when they sell a home that was given to them or that they received, among other types of foreign property.
How to use tax deals and agreements to avoid double taxation
Treaties between the US and other countries about taxation are very important when figuring out how American expats will be taxed when they sell their home abroad. By setting up agreed-upon tax rules, these deals try to stop countries from taxing each other twice and encourage trade and investment across borders.
People who live outside of the US need to know the specifics of the contract that applies to their home country. These rules might change how capital gains tax is calculated and how foreign assets are reported.
These are some of the tax treaties that the US has with popular expat destinations, along with some of the perks they give to American expats.
Tax deals between the US and other countries
Tax deal with Canada: The US and Canada have a tax deal that keeps people from being taxed twice. Unfortunately, the “Savings Clause” lets the US charge its people as if the treaty didn’t exist, which makes it much less useful. American citizens living in Canada should use the Foreign Tax Credit to solve the problem.
United Kingdom: The US and the UK share a tax agreement. The treaty spells out which country has the “first” and “sole” right to tax. In the same way, the pact aims to stop the two countries from taxing each other twice. Since taxes are higher in the UK than in the US, people who use Foreign Tax Credits may be able to completely offset all of their US tax obligations or end up with large tax credits.
Australia: The US-Australia tax deal says that retirement income is taxed more favourably and that a business is taxed where it is registered. However, using the Foreign Tax Credit is still the best choice for people who want to avoid double taxation on income taxes or capital gains taxes.
France: The US and France have a tax deal that lets them share information and says how income is charged. The Foreign Tax Credit is the best way to avoid double taxation, though, just like with the other deals. This is especially true since France has higher tax rates than the US.
Germany: With a tax rate of 48.1%, Germany has the second-highest tax rate in the OECD, behind Belgium’s 52.6%. The US and Germany have a tax deal that says what taxes should be paid and to whom.
How tax deals can change the taxes you have to pay when you sell a foreign property
Many tax deals have something called the “Savings Clause.” This means that they are not generally useful for selling foreign property.
Also, if you don’t have any tax deals, you might have to report your capital gain on the property you sold in both the US and the country where it is located.
Tax deals are usually useful because they let you get a tax credit for taxes paid to one country and use that credit to pay less taxes in another country. This keeps you from being taxed twice.
Tips for lowering your tax bill when you sell a foreign property
Tax Break for Home Sales
The IRS says that your primary residence is a home that you have stayed in and owned for at least two of the last five years. If you sell your primary residence, you can avoid paying capital gains taxes on up to $250,000. The exclusion amount goes up to $500,000 if you are married and file equally. But you can’t have used a home sale clause in the last two years.
1031 Trade
A 1031 Exchange, which is also called a like-kind exchange or a tax-deferred exchange, is an IRS rule that lets people and businesses put off paying capital gains taxes on the sale of certain types of properties as long as they buy another property that is identical. However, there are a lot of complicated requirements that must be met. The most important thing to note is that this choice is only available for investment and business buildings, not for taxpayers’ own homes. If you’re not sure what to do, talk to your foreign tax accountant before starting a 1031 swap.
Stay away from short-term capital gains
The IRS charges short-term capital gains at marginal income tax rates (10% to 37%), but not long-term capital gains. This approach lowers taxes because of this. Also, if you can, hold on to a home for more than one year.
Use the Foreign Tax Credit (6) to lower your US tax bill.
The Foreign Tax Credit (FTC) lets US citizens living abroad avoid being taxed twice by letting them use a foreign income tax bill to lower their US tax bill.
An Example of how it works
If Ramsey, who lives in Montreal but is a citizen of the US, sells a house in Toronto. It makes her $100,000 after the sale. In both the US and Canada, he will have to report and pay capital gains tax on the gains.
Ramsey can, however, credit the amount she owes the Canadian Revenue Agency against the tax he has to pay in the US.
