Greetings, fellow US expats! Are you considering selling your foreign property and searching for a comprehensive guide to help you navigate the process? This article explores the ins and outs of selling a foreign property. Additionally, we break down implications for your US taxes and overview many foreign tax considerations to bear in mind.
Selling property abroad comes with unique challenges, legal requirements, and seemingly endless paperwork. But don’t worry – we’re here to help you understand the essentials and make the process feel a little less daunting. Let’s start with an overview of capital gains. Capital gains are a forefront consideration for US expats selling all types of foreign property.
Capital gains – what they are, how to calculate them, and why they matter when selling a foreign property
A capital gain refers to the profits or “gains” made from the sale or disposition of a capital asset, such as real estate. The gain is calculated based on the increase in the property’s value from when you became the owner of the property (its “basis”) to when you sell it.
In mathematical terms:
Sales Price – Basis = Capital Gain
Your basis in the house for the purposes of a sale is generally calculated as its costs plus the value of any enhancements made to it. (Examples of enhancements may include replacing the roof, repairing windows, or installing an air conditioning system.)
However: determining the basis of gifted foreign property and inherited foreign property differs, as we’ll dig into further on.
The tax rate for capital gains depends on the following:
The amount of capital gain
The tax filing status of the seller, and
The classification of capital gains, whether short-term (if you held the property for less than a year) or long-term (if you held the property for a year or more).
Most capital gains on property are long-term, for which the following tax rates apply.
Long-term capital gains taxes, 2023
Tax rate
Single
Married and filing separately
Married and filing jointly
Head of household
0%
$0 – $44,625
$0 to $41,675
$0 – $89,250
$0 – $59,750
15%
$44,626 – $492,300
$41,676 – $258,600
$89,251 – $553,580
$59,751 – $523,050
20%
$492,301+
$258,600+
$553,581+
$523,051+
For short-term capital gains for property held less than a year, the tax rate is the same as the seller’s ordinary income tax rates. These are between 10% and 37%.
Now that we’ve established a baseline understanding of capital gains, let’s contextualize this learning within two distinct frameworks: selling a gifted home and selling an inherited foreign property. Let’s begin with selling a gifted home.
Tax implications of selling a gifted house
The IRS defines a gifted home as one that is transferred to you for nothing in return or a sum less than its fair value.
Sometimes expats want to sell a gifted home. However, selling a property you received as a gift has tax implications you’ll want to carefully consider so that you can maximize your profit on the sale.
Moreover, the basis value of a gifted home is usually carried over from the donor’s original basis. This is known as a “carryover” basis. As a result, if the property is sold, the taxable gain or loss will be calculated based on the original basis of the property, which may be lower than the current fair market value (FMV). This can result in a higher taxable gain and potentially more capital gains tax liability compared to inherited property.
Additionally, when you sell a gifted house, you’ll generally need to pay capital gains tax on the profits. Refer back to the table above to understand at what point you become liable for capital gain tax.
Next, let’s take a look at a few tax forms you’ll likely need to file after selling your gifted home.
Tax implications of selling an inherited foreign property
Selling an inherited property you received as a beneficiary of a deceased person’s estate and selling a gifted home are both actions that require the taxpayer to calculate capital gains and the corresponding capital gains tax.
However, there is one big difference between selling a gifted home and selling an inherited foreign property.
The key difference that a seller must be mindful of is the property’s “basis” value. The basis value of a property is used to calculate the taxable gain or loss upon sale.
For inherited foreign property, the basis value is generally “stepped-up” to the fair market value (FMV) of the property at the time of the decedent’s death. This means that the property’s basis is adjusted to its FMV. In turn, this effectively erases any potential capital gains that may have accrued during the decedent’s ownership. As a result, if the property is sold shortly after inheriting it, the taxable gain may be minimal or even zero, as it is calculated based on the stepped-up basis.
Mathematically speaking, we can estimate the capital gain on an inherited foreign property by calculating the following:
Sales price – Fair market value at the time of decedent’s death = Capital gain
When selling an inherited property as an expat, you will also need to consider how best to comply with foreign tax laws. Many expats find it worthwhile to collaborate with a tax professional or a qualified international tax attorney, and/or an international estate planner.
Tax implications of foreign real estate sales – additional examples
Example 1: Selling a primary residence
If the property was your primary residence and you lived there for 24 out of the last 60 months, you’re eligible for a capital gains tax exclusion. The IRS specifies in Section 121 that you can exclude up to $250,000 in capital gains from taxation. If you’re married and file a joint tax return, this increases to $500,000.
Let’s say you’re a US expat who lived abroad in Iceland for the past three years in a home you purchased in 2019. If this home is your primary residence and you lived there for at least two out of the last five years, you can qualify for this exclusion. So, if you bought the house for $300,000 and sold it for $450,000, your profit (read: capital gains) would be $150,000. This profit is less than the capital gains exclusion, so you would not report your home sale on your US tax return.
There are some exceptions that still allow you to take the capital gains exclusion (or part of it) if you don’t meet the 24/60 month rule, however. For example, if you had to sell your house because of unforeseen circ*mstances – such as a divorce, change of employment, or change in health – you may still be able to claim a partial or full exclusion.
Example 2: Selling a rental property
If you owned the property for less than one year, the IRS considers this a short-term capital gain. To report this, complete Section I of Schedule D. The IRS would tax you at your ordinary tax bracket, meaning the rate that applies to other types of ordinary income such as your wage, or interest income.
Capital gains on rental properties owned for more than one year are treated a little differently. In order to figure out the tax on the sale of a rental property, you’ll need to:
Determine your cost basis, which includes the original purchase price, purchase expenses (like title and escrow fees), improvements or renovations
Adjust for the accumulated depreciation you reported (or should have reported) on all tax returns filed during your ownership of the property
As a reminder, these numbers together are considered the tax basis on your property.
Next step: subtract the tax basis from the proceeds of the sale. If the resulting number is positive, it means you profited or generated a gain on the sale and you may owe the US capital gains tax. In this case, you would be taxed partly on the amount you earned on the sale and partly on the amount of depreciation you claimed on the home, in what’s called a “depreciation recapture.”
If the number is negative, you did not make a profit and you would not owe any capital gains tax, because the sale resulted in a loss. Your loss may be deductible to offset other income you have on your tax return.
Example 3: Selling another type of property
There are of course other ways to own property aside from a primary residence or a rental property, such as a vacation home or an investment property.
If you own a property for more than one year, it was not your primary residence, and you did not rent it out, you could owe the long-term capital gains tax, which ranges from 0-20%. However, you are only eligible for a tax deduction when you sell the property for a loss and if it was considered a capital asset, not a personal use asset (e.g., a vacation home).
How to report the sale of foreign real estate
The way you’ll report your home sale to the US depends on the location and country of the property. Another factor is whether the money from the sale was deposited into a US bank account. If you received foreign currency for the home sale, for instance, you would have to use the foreign exchange rates associated with the different key figures (for example, date of purchase, date of renovation, sale date) and report in US dollars on your tax return.
Tax forms associated with selling a foreign property
You may need to file three tax forms if you sell a gifted house.
FBAR
FBAR is an acronym for Foreign Bank Account Report. Any American, including expats, with at least $10,000 in a foreign financial account must comply with FBAR by filing FinCEN Form 114 (1). It’s important to note that the requirement for filing an FBAR is met when the aggregate across all foreign accounts exceeds $10,000 and may be triggered at any point in the year.
If you sell a gifted property, you’ll likely need to file an FBAR if you deposit the sales proceeds in a foreign bank account.
Form 8949 “Sales and Other Dispositions of Capital Assets”
Anyone who sells a house, gifted or not, must file Form 8949 (2) and report any capital gains.
Schedule D (3)
This is where you summarize all the capital gains you put on Form 8949.
Note: Whether you’re selling a gifted home or a foreign property you inherited, or another type of foreign property, there will always be foreign tax considerations for expats, too.
Navigating taxation treaties and double taxation agreements
US taxation treaties with foreign countries play a crucial role in determining the tax implications of selling a house abroad for American expats. These treaties aim to prevent double taxation and promote cross-border trade and investment by establishing mutually agreed-upon tax rules.
American expats need to understand the specific provisions of the treaty in effect between the US and their country of residence. These provisions may impact the calculation of capital gains tax and the reporting of foreign assets.
The following is a brief overview of US taxation treaties with common expat destinations and the benefits they offer to American expats.
Common US tax treaties with other countries
Canada: The US has a tax treaty with Canada whose aim is to prevent double taxation. Unfortunately, because of the “Savings Clause,” which permits the US to tax its citizens as if the treaty did not exist, its benefits are significantly eroded. The solution is for American expats residing in Canada to take advantage of the Foreign Tax Credit.
United Kingdom: The US has a tax treaty with the UK. The treaty defines which country has “first” taxing rights and “sole” taxing rights. Similarly, the treaty aims to prevent double taxation between the two countries. Since the UK is a higher tax jurisdiction than the US, those who utilize Foreign Tax Credit may entirely offset all their US tax obligations or find themselves with significant tax credits.
Australia: The US-Australia tax treaty specifies the favorable treatment of retirement income and states that a company will be taxed where it is registered. However, taking advantage of Foreign Tax Credit remains the best option for those who want to avoid income tax-related double taxation including capital gains tax.
France: The US has a tax treaty with France that provides for the exchange of information and defines where income is taxed. However, as with the other treaties, the best way to avoid double taxation is by taking advantage of Foreign Tax Credit, especially since France has higher tax rates than the US.
Germany: At 48.1%, Germany has the second-highest tax rates (4) of all OECD countries—after Belgium’s 52.6%. There is a tax treaty between the US and Germany that spells out which taxes are to be paid and to whom.
How tax treaties can affect the tax consequences of selling a foreign property
As a result of the Savings Clause found in many tax treaties, they are usually not an effective tool when selling foreign property.
And without tax treaties in your toolkit, you may need to report your capital gain on the property you’ve sold—both in the US and the country where the particular property is located.
Usually, where the tax treaties can be helpful is to allow you credit for the tax paid to one country and offset the other’s tax bill – thereby eliminating double taxation
Tips for minimizing tax liability on the sale of a foreign property
In this section, we explore options you can use to minimize your tax liability when selling a foreign property.
How to avoid capital gains tax on foreign property
These are the ways you can avoid capital gains tax or reduce your liability.
Home Sale Tax Exclusion
If you’re selling your primary residence, which the IRS defines as a house you’ve lived in and owned for two of the preceding five years, you can exclude up to $250,000 from capital gains. That exclusion amount doubles to $500,000 if you’re married and filing jointly.
But you must not have claimed a home sale exclusion within the prior two years.
1031 Exchange (5)
Also known as a like-kind exchange or a tax-deferred exchange, a 1031 Exchange is an IRS provision that allows individuals and businesses to defer paying capital gains taxes on the sale of certain types of properties if they reinvest the proceeds into another similar property. There are several complex conditions to meet, however. The chief callout here is that this option is only available for investment and business properties, not for individual taxpayers’ personal residencies. When in doubt, connect with your expat tax accountant to strategize before embarking on a 1031 exchange.
Avoid Short-term Capital Gains
This is a tax reduction strategy because short-term capital gains, unlike long-term capital gains, are taxed at marginal income tax rates (10% – 37%). So hold on to a property for more than one year if your situation allows.
Apply the Foreign Tax Credit (6) to reduce US tax liability
The Foreign Tax Credit (FTC) allows US expats to avoid double taxation by permitting those with a foreign income tax bill to set it off against their US tax bill.
Here’s how it works.
If Emma, a resident of Montreal but a US citizen, sells a house in Toronto. She earns a profit of $100,000 on the sale. Both the US and Canada will require her to report the capital gains and pay capital gains tax.
However, Emma can offset her US tax liability by the amount she owes the Canadian Revenue Authority—dollar for dollar.
Maximize your benefits by partnering with an expert in US expat tax
Selling foreign property as a US expat can have significant tax implications. But, with the correct information and guidance, it can also be a profitable and fulfilling experience. By understanding the unique tax laws and regulations in each country and the impact of US taxation treaties, you can ensure that you receive the full benefit of your investment.
If you are looking for a reliable and experienced expat tax filing service, consider Bright!Tax. Founded by expats, we understand the challenges and complexities of tax planning for US taxpayers living abroad. In addition to empowering our clients with the confidence that their tax return is prepared to their maximum benefit, our clients receive exclusive access to a network of vetted financial advisors who can assist you.
Get in touch with us today to learn more about our expertise in navigating the sale of foreign property.
That means any gain from selling your primary residence overseas is usually tax-free, as long as you meet the occupancy requirements and your gain is below these thresholds: $500,000 – if you're married filing jointly. $250,000 – if you use any other filing status.
You have to report the sale of foreign property to the Internal Revenue Service (IRS) when you sell it, just as you would any other sale of property in the U.S.
Under U.S. tax law, a foreign person that sells or exchanges a U.S. real property interest must report the gain on a U.S. tax return, and the buyer of the U.S. real property interest must withhold and pay to the IRS 10 percent of the gross amount paid to the foreign person.
When you sell a property overseas, you're responsible for capital gains taxes — or taxes you owe when you sell a property for more than you paid for it. You must report any capital gains on Form 1040, Schedule D in USD.
The capital gains tax applies to profits made from the sale of investments, including properties, and is applicable to Americans residing abroad as per US tax laws. The IRS provides tax credits and exclusions that many expats can use to avoid paying a capital gains tax.
Investing in retirement accounts eliminates capital gains taxes on your portfolio. You can buy and sell stocks, bonds and other assets without triggering capital gains taxes. Withdrawals from Traditional IRA, 401(k) and similar accounts may lead to ordinary income taxes.
There are serious consequences if you don't report your foreign accounts. If you don't disclose your offshore accounts, you may be caught through an IRS audit and your foreign accounts may be frozen. The IRS may also impose penalties for failure to comply with offshore account disclosures.
You are an international seller, with no physical presence or sales into the United States. If you do not have a physical presence in the U.S., nor make sales into the U.S., then you are not required to collect U.S. sales tax.
A qualified investment entity is any real estate investment trust (REIT) or any regulated investment company (RIC). The entity is domestically controlled if at all times during the testing period less than 50% in value of its stock was held, directly or indirectly, by foreign persons.
As with any type of income, even if you don't owe taxes to the IRS, you still have to report the income to the agency. In a tax year in which you sold an inherited foreign property, you must report the sale on Schedule D of IRS Form 1040, U.S. Individual Income Tax Return.
If you plan to purchase property from a foreign person or corporation and want to avoid FIRPTA withholding taxes, you can apply for a withholding certificate from the IRS. The IRS only grants withholding certificates in certain situations, and applying for a certificate does not guarantee you will be granted one.
When you sell your principal residence, you are eligible for a gain exclusion of $250,000 USD, or $500,000 USD for married principal owners. If you don't qualify for the gain exclusion, any gain will be considered foreign income and thus eligible for the Foreign Tax Credit.
Those include Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, and Wyoming. It's no coincidence that these eight are also no personal income tax states.
In 2023, individual filers won't pay any capital gains tax if their total taxable income is $44,625 or less. The rate jumps to 15 percent on capital gains, if their income is $44,626 to $492,300. Above that income level the rate climbs to 20 percent.
Some American expats who work abroad may also need to pay US social security and Medicare taxes on their earned income, especially if they are self-employed or work for a US-based employer. For the 2022 tax year, the rate for expat employees is 7.65%. For self-employed expats, however, the total is double, at 15.3%.
In this example, you see a capital gain of $100,000 on your home sale. If your income and asset class put you in the 20% capital gains tax bracket, you pay 20% of your profit. That's 20% of $100,000, or $20,000. You don't need to pay 20% of the entire $350,000 sale because you had to spend $250,000 to buy the asset.
When you sell a property that you've lived in for at least two of the last five years, you qualify for the homeowner exemption (also known as the Section 121 exclusion) for real estate capital gains taxes. Single homeowners pay no capital gains taxes on the first $250,000 in profits from the sale of their home.
Filing the sale of your foreign home is similar to reporting the sale of a home on US soil. To do so, you'll need to file the IRS Form 8949 and a Schedule D as well for any rental properties you own. In some cases, you might also have to file Form 8938 (Statement of Specified Foreign Financial Assets).
Foreign stock or securities, if you hold them outside of a financial account, must be reported on Form 8938, provided the value of your specified foreign financial assets is greater than the reporting threshold that applies to you.
Generally speaking, it's likely that you own the property underneath and around your house. Most property ownership law is based on the Latin doctrine, “For whoever owns the soil, it is theirs up to heaven and down to hell.” There can be exceptions, though.
Yes, eventually the IRS will find your foreign bank account. When they do, hopefully your foreign bank accounts with balances over $10,000 have been reported annually to the IRS on a FBAR “foreign bank account report” (Form 114).
You must report any account with more than $10,000, or if your combined accounts have a total value greater than $10,000. In addition, overseas banks are required to report their U.S.-owned accounts or risk exclusion from U.S. markets. Internal Revenue Service. "Report of Foreign Bank and Financial Accounts (FBAR)."
US taxpayers are required to report their worldwide income and foreign financial assets annually on their tax returns and on international informational reports, such as FinCEN Form 114 (FBAR), Form 8938, etc.
The amount of import tax and duties to be paid depends on the country from which the goods are imported. Duty tax rates are between 0 to 37.5% with the typical rate being 5.63%. A flat rate of 3% applies to e-commerce purchases that are in excess of the US import tax threshold limits.
Whether or not you will owe taxes for selling personal items, goods, or services online will depend on several factors, including whether you made a profit. Usually, you need to pay federal income taxes and self-employment taxes if you make more than $400 during the tax year.
Manufacturer Buying Materials to Use in Manufacturing. Similar to retailers, manufacturers are also eligible to buy goods without paying sales tax. ...
Government Entities. In most US states, sales to government entities are tax exempt. ...
If the sale price is under $300,000 and the buyer plans to occupy the property as their primary residence, they are not required to withhold anything under FIRPTA. If the property price is $300,000 or more, then there are two potential withholding rates depending on the situation.
To ensure collection of the FIRPTA tax, any transferee or buyer acquiring a U.S. property interest must deduct and withhold a tax equal to 15 percent of the amount realized on the disposition.
A seller may be exempt from FIRPTA if one or more of these circ*mstances apply: The sales price is less than $300,000 and the buyer (or a family member) has definite plans to reside in the home for at least 50% of the first 24 months of ownership.
Each individual has a $11.7 million lifetime exemption ($23.4M combined for married couples) before anyone would owe federal tax on a gift or inheritance. In other words, you could gift your son or daughter $10 million dollars today, and no one would owe any federal gift tax on that amount.
In California, there is no state-level estate or inheritance tax. If you are a California resident, you do not need to worry about paying an inheritance tax on the money you inherit from a deceased individual. As of 2023, only six states require an inheritance tax on people who inherit money.
U.S. citizens are subject to U.S. estate taxation with respect to their worldwide assets, even if they are not residents of the U.S. An estate tax return, Form 706, United States Estate (and Generation-Skipping) Tax Return, Estate of a citizen or resident of the United StatesPDF, is required for a deceased U.S. citizen ...
If the Sales Price is under $300,000 – no withholding is required when a Buyer signs his Declaration (see #6a) If the Sales Price is between $300,001 and $1,000,000 – the withholding is 10% of the Sales Price. If the Sales Price is $1,000,001 and over – the withholding is 15% of the Sales Price.
A prudent broker will have a list of CPAs or attorneys who are familiar with FIRPTA to provide to a seller with a foreign status. The CPA or attorney can guide the seller and advise them regarding their tax obligations under this law.
In most cases, the buyer (transferee) is the withholding agent. The transferee must find out if the transferor is a foreign person. If the transferor is a foreign person and the transferee fails to withhold, the transferee may be held liable for the tax.
A Standard Document delivered by the seller in a real property transaction to inform the purchaser, and the purchaser's lender, that the seller is not a foreign (non-US) individual or entity and therefore not subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
However, the passing of the Taxpayer Relief Act of 1997 abolished that exemption. Although you must now pay capital gains tax when selling investment properties, the over-55 home sale exemption has been replaced by a home sale exemption that can benefit taxpayers of any age.
The IRS allows no specific tax exemptions for senior citizens, either when it comes to income or capital gains. The closest you can come is a back-end tax-advantaged retirement account like a Roth IRA which allows you to withdraw money without paying taxes.
United States citizens who move to other countries still need to file their taxes and report their assets, which means that they have to report the real estate that they own in other countries.
Do US Citizens Have to Pay Taxes on Foreign Property? All US citizens must file a yearly tax return regardless of where they live in the world. When filing your return, you must report your worldwide income. This includes any gain or loss from selling a foreign property and rental income.
For example, a death in the family, losing your job and qualifying for unemployment, not being able to afford the house anymore because of a change in employment or marital status, a natural disaster that destroys your house, or you or your spouse have twins or another multiple birth.
Do US Citizens Have to Pay Taxes on Foreign Property? All US citizens must file a yearly tax return regardless of where they live in the world. When filing your return, you must report your worldwide income. This includes any gain or loss from selling a foreign property and rental income.
In order to qualify for a 1031 Exchange, the replacement property in question must be located within the United States. This means that you can purchase property in any state, but you cannot use a 1031 Exchange to buy property in another country.
If you're an expat and you qualify for a Foreign Earned Income Exclusion from your U.S. taxes, you can exclude up to $108,700 or even more if you incurred housing costs in 2021. (Exclusion is adjusted annually for inflation). For your 2022 tax filing, the maximum exclusion is $112,000 of foreign earned income.
Key Takeaways. When Americans buy stocks or bonds from foreign-based companies, any investment income (interest, dividends) and capital gains are subject to U.S. income tax and taxes levied by the company's home country.
How Often Can You Claim the Capital Gains Exclusion? You can exclude capital gains from the sale of a primary residence once every two years. If you want to claim the capital gains exclusion more than once, you'll have to meet the usage and ownership requirements at a different residence.
Long-term capital gains tax rates for the 2023 tax year
In 2023, individual filers won't pay any capital gains tax if their total taxable income is $44,625 or less. The rate jumps to 15 percent on capital gains, if their income is $44,626 to $492,300. Above that income level the rate climbs to 20 percent.
The tax code specifically excludes some property even if the property is used in trade or business or for investment. These excluded properties generally involve stocks, bonds, notes, securities and interests in partnerships. Property held “primarily for sale” is also excluded.
Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.
1031 exchange is an exception to the FIRPTA and can be obtained when the foreigner applies for a withholding certificate on IRS form 8288-B before the sale.
To ensure that the buyer does not withhold funds, the foreign seller should file a 1031 Declaration Notice. With advance planning, you can receive permission from the IRS to prevent FIRPTA withholding on your sale. Once you have received an ITIN or EIN, then you can apply.
Special Rules for When Foreigners Sell US Property
Under the Foreign Investment Real Property Tax Act (FIRPTA), when a US non-resident sells real property, 10% of the gross sale price will be withheld for the IRS automatically.
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