The capital gains tax can be complicated for anyone—especially Americans living abroad. The good news is that the U.S. government offers several tax breaks to help ease the burden. Whether you’re selling stocks or real estate, here’s everything expats need to know about capital gains tax in the US—including how to lower it.
In this guide, we’re going to answer some of the most common questions about capital gains taxes for expats, such as:
What is the capital gains tax?
Do expats have to pay capital gains taxes?
How should you calculate and report your capital gains?
Let’s take a closer look at how the US capital gains tax impacts Americans abroad.
Key Takeaways
Capital gains are profits realized from the sale of various investments, including real estate, vehicles, jewelry, stocks, bonds, and cryptocurrencies.
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.
What Is the Capital Gains Tax?
To understand the capital gains tax, we need to start by defining capital gains and losses.
A capital gain is a profit made from the sale of a property or other investment
A capital loss is a loss resulting from the sale of a property or other investment
For example, if you bought a house for $200,000 and sold it for $250,000, you would have a capital gain of $50,000. If you sold that same house for only $175,000, you would instead have a capital loss of $25,000.
Take Note
This is simply a brief summary of the concept of a capital gains tax. The actual calculations for determining a capital gain or loss are more complex. For example, you can use any improvements or repairs done to an asset to offset the capital gain amount. We will cover this in more detail below.
Capital gains and losses can apply to the sale of a wide variety of property and investments, such as:
Real estate
Vehicles
Jewelry
Stocks
Bonds
Generally, any time you sell an asset for more than you bought it, that counts as a capital gain. The US government taxes these capital gains under the capital gains tax. In most cases, the rate for this tax ranges from 15%–20% based on your income level.
Do Expats Have to Pay a Capital Gains Tax?
Depending on the details of the sale, an expat may or may not have to pay a capital gains tax. Technically, all capital gains made by a US citizen are taxable. This is true regardless of whether you are selling US property or foreign property.
For example, if you sold a rental property in Florida and received a capital gain, that gain is taxable. The same would be true if you sold a home in Italy.
However, while all capital gains are taxable in theory, the IRS does provide certain exclusions and credits you may be able to use to avoid paying the tax. The two most common are the Primary Residence Exclusion and the Foreign Tax Credit.
1. Primary Residence Exclusion
If you are selling your primary residence, you can automatically exclude all capital gains up to a maximum of $250,000 if filing as single, or $500,000 if you file as married filing jointly.
You can generally only use this exclusion once every two years. For example, if you sell your current home and buy a beach house, you can exclude the gain from your current home. However, if you decide next year to sell your beach house, you won’t be able to exclude the capital gain from the sale again.
For a home to qualify as your primary residence, you must have lived in it for at least two out of the previous five years. If the home does not meet this standard, you will generally have to pay the full capital gains tax. However, there are exceptions to this rule. A tax professional can help you determine the right course of action for your specific situation.
2. Foreign Tax Credit
As an American living abroad, you may be required to pay a capital gains tax to a foreign government when selling a foreign property. Of course, this could create a risk for double taxation—being taxed twice for the same capital gain, once by the US and again by a foreign government.
US expats can utilize the Foreign Tax Credit to offset capital gains taxes by leveraging the tax relief provision that allows US taxpayers who have paid foreign taxes on their income, including capital gains from the sale of foreign property, to offset their US tax liability with the amount of foreign taxes paid.
The Foreign Tax Credit is a dollar-for-dollar reduction in your US taxes using taxes paid to a foreign country on the same income. (However, capital gains cannot be offset using the Foreign Earned Income Exclusion, as the gains are not considered “earned” income, which is a requirement to utilize this exclusion.)
By using the Foreign Tax Credit, you can protect yourself from double taxation by deducting the taxes you paid to a foreign government from your US tax bill.
Who doesn’t love a tax break? Use our handy calculator to learn what you can save using the FEIE.
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!
How to Calculate Your Capital Gain or Loss
1. Determine the Cost Basis of the Asset
Before you can figure out your foreign capital gain tax (or loss), you will first need to know what the cost basis for the asset is. The cost basis represents your investment in a piece of property, including both the original price and any upgrades or repairs you may have made.
For example, if you bought a home for $300,000, that would be your original cost basis. If the closing costs came to $18,000, then your cost basis would rise to $318,000. If you invested $60,000 into remodeling your home a few years later, you would add that to your cost basis as well, for a total of $378,000.
Your cost basis can also decrease over time, though this is less likely. The most common example would be a decrease due to the depreciation of a property used for business.
2. Calculate Your Gain or Loss
Once you know the cost basis of an asset, you can calculate the capital gain or loss resulting from the sale.
To calculate a gain, simply subtract the sale price from the cost basis. In the example above, the total cost basis for a home was $378,000. If you sold that home for an even $400,000, that would give you a capital gain of $22,000 ($400,000 – $378,000 = $22,000).
To calculate a loss, subtract the cost basis from the sale price. Using the example above again, if you sold the home for $350,000, you would have a loss of $28,000 ($378,000 – $350,000 = $28,000).
3. Factor in Exchange Rates (If Applicable)
Calculating gains or losses on the sale of US property is fairly straightforward. However, when selling foreign property, you must consider foreign exchange rates. The IRS requires converting all foreign currency amounts to US dollars before calculating gains or losses.
Since exchange rates fluctuate daily (if not hourly!), you should consider the rate before you buy and sell. The exchange rate used for both buying and selling property will be considered the spot rate for the day unless otherwise specified. In fact, gains and losses can even be created by an exchange rate difference.
For example, let’s say you purchased 100 acres of land in Germany on July 1, 2020, for 500,000 euros (EUR). You sell the land on July 1, 2021, for 500,000 EUR. At first glance, you have no gain since you sold the land for the same amount you purchased it for, but since you have to convert the euro to the dollar, this is not the case.
On July 1, 2020, the EUR-USD exchange rate was 0.896 EUR per $1 USD. On July 1, 2021, the exchange rate was 0.917 EUR per $1 USD. Now, if we use those figures to convert the 500,000 EUR you spent on your land in Germany to USD, you’ll get these results:
Purchase price: $558,035.71 (500,000 ÷ 0.896)
Sale price: $545,256.27 (500,000 ÷ 0.917)
When you subtract the sale price from the purchase price, you will have a capital loss of $12,779.44 US. If the post-conversion sale price had been higher than the purchase price, you would have made a taxable capital gain instead—even though the sale and purchase prices were identical before being converted to USD.
4. Determine If Your Capital Gains Are Short-Term or Long-Term
If you have any capital gains to report, you will need to know if they are short-term or long-term gains. This is based on how long you owned the asset before selling it.
If you held the asset for one year or less, any gains made from the sale would be considered short-term gains.
If you held the asset for more than one year, any gains made from the sale would be considered long-term gains.
This distinction is important because different tax rates apply to short-term and long-term assets. Gains from assets held for less than one year will be taxed at the same rate as your ordinary income. Long-term assets are eligible for reduced rates, which can be 15% or even 0% depending on the individual situation.
Take Note
One exception to the above rule is the sale of any property that is considered “collectible.” Collectibles include items like artwork, coins, precious metals, and antiques. Capital gains made from the sale of collectibles are taxed at a 28% rate regardless of how long they have been held.
5. Report Your Capital Gains or Losses on Your Expat Tax Return
You can use your capital losses to offset your capital gains. This will reduce the taxable portion of your gains. Your capital losses may exceed the total capital gains by up to $3,000 on the tax return. Any losses over $3,000 and not claimed on the tax return can be carried forward to a future year or carried back to a previous tax year.
Still Have Questions Regarding Foreign Capital Gains? Get the Answers You Need!
We hope this guide has helped you understand how capital gains taxes impact Americans living abroad. Of course, the most common use for this information will be buying and selling property overseas. Contact us, and one of our customer champions will be happy to help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
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Whether you need tax advice to prepare for a move abroad, to buy property or even retire, Greenback can help. Consults upfront can help avoid costly mistakes and stress later.
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.
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.
This means that you would be able to sell the property within the six-year period and be exempt from paying capital gains tax just as you would if you sold the house considered your main residence. The six-year absence rule exists because there are many reasons why you may not be living in your property for some time.
Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during a 12-month period including some part of the year at issue. You can count days you spent abroad for any reason, so long as your tax home is in a foreign country.
The US tax laws for citizens living abroad are essentially the same for those living in America. Expats file the same Form 1040 and are subject to the same US federal income tax rates. While expats can use form 1040, it's always a good idea to read up on the other important tax forms for expats.
If you are a nonresident alien, generally you will not have to pay U.S. capital gains tax on your investment earnings. If you are a resident alien, generally, you will be subject to the same capital gains tax as U.S. citizens. Consult with a tax advisor for any assistance you may need.
Well, if you qualify for the Foreign Tax Credit, the IRS will give you a tax credit equal to at least part of the taxes you paid to a foreign government. In many cases, they will credit you the entire amount you paid in foreign income taxes, removing any possibility of US double taxation.
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.
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.
This five-year period is from when the individual's sole UK tax residence ceases. If a non-resident becomes resident again in the UK during this five-year period, any assets sold after leaving the UK will be taxed in the UK when the individual returns.
Generally, this means that if you spent 183 days or more in the country during a given year, you are considered a tax resident for that year. Each nation subject to the 183-day rule has its own criteria for considering someone a tax resident.
183 days during the 3-year period that includes the current year and the 2 years immediately preceding the current year. To satisfy the 183-day requirement, count: All of the days you were present in the current year, One-third of the days you were present in the first year before the current year, and.
The so-called 183-day rule serves as a ruler and is the most simple guideline for determining tax residency. It basically states, that if a person spends more than half of the year (183 days) in a single country, then this person will become a tax resident of that country.
Three-of-five test is a rebuttable IRS presumption that a business venture that does not make a profit during three out of the last five consecutive years of operation is a hobby and is not a business for the purposes of assessing tax - per [Section 183 (d)].
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.
You Can Reduce or Eliminate US Taxes for Expats with the Foreign Earned Income Exclusion. For the 2022 tax year, you may be able to exclude up to $112,000 of foreign-earned income from US taxation with the Foreign Earned Income Exclusion! This is the most common way expats reduce or eliminate their US tax liability.
The penalty for not filing your tax return is 5% of the amount of tax shown on the return for each month you have not filed, up to 25% of your tax owing. If you fail to pay, the IRS imposes a ½ percent penalty for each month that the amount remains unpaid, up to 25% of your total tax owing.
U.S. taxes are based on citizenship, not country of residence. That means it doesn't matter where you call home, if you're considered a U.S. citizen, you have a tax obligation. Your expat tax filing requirement doesn't change even if you're paid by a foreign employer overseas.
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. (Although, Tennesee has a limited tax on certain dividends and capital gains, and New Hampshire taxes interest and dividends income.)
you may also owe Foreign capital gain taxes to the country in which the overseas property lies, but you may be able to avoid paying capital gains taxes to both countries by claiming the foreign tax credit, which is a dollar-for-dollar credit on taxes paid to one of the countries.
Generally, this 10-year period is also the limitation period for refund claims relating to a foreign tax credit. The limitation period for refund claims relating to a deduction of foreign taxes generally must be filed within three years from the filing date of the return, or two years from the date any tax was paid.
A DTA is therefore a contract signed by two countries (referred to as the contracting states) to avoid or alleviate (minimise) territorial double taxation of the same income by the two countries. Any amendment or addition to such an agreement is known as 'a protocol'.
Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they moved out of their PPOR and then rented it out.
In contrast to the lower 99% who earn most of their income from wages and salaries, the top 1% earn most of their income from investments. From work, they may receive deferred compensation, stock or stock options, and other benefits that aren't taxable right away.
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.
50% Rule: Simplistically, if the buyer, at the time of sale, has plans to reside at the property, more than it will be rented out, over each of the following two 12-month periods, the sale is potentially eligible for the exemption. Uncertainty can arise in counting days of residing at the property.
The Foreign Account Tax Compliance Act (FATCA) requires foreign banks to report account numbers, balances, names, addresses, and identification numbers of account holders to the IRS.
After your 5th calendar year in the United States you become a resident for tax purposes. We recommend you work through the initial steps of the Sprintax process to confirm your tax residency so you can correctly file your taxes.
Permanent resident aliens have both a social security number and a green card from the United States Citizenship and Immigration Services (USCIS), which equates to permanent residency; non-permanent resident aliens have only a social security number and no green card.
The Roth IRA five-year rule says you cannot withdraw earnings tax-free until it's been at least five years since you first contributed to a Roth IRA account. This five-year rule applies to everyone who contributes to a Roth IRA, whether they're 59 ½ or 105 years old.
U.S. immigration law assumes that a person admitted to the United States as an immigrant will live in the United States permanently. Remaining outside the United States for more than one year may result in a loss of Lawful Permanent Resident status.
However, U.S. citizens who live and work abroad may be considered tax residents of another country if they meet certain criteria, such as spending a certain number of days in that country or having a permanent home there.
You are a resident of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1 – December 31). Certain rules exist for determining your residency starting and ending dates.
When you enter the U.S., a customs officer will give you authorization to stay in the the country for up to six months. If you'd like to stay for longer, you may be able to apply to extend this for up to one year.
An applicant applying for naturalization under INA 316, which requires 5 years of continuous residence, must then wait at least 4 years and 1 day after returning to the United States (whenever 364 days or less of the absence remains within the statutory period), to have the requisite continuous residence to apply for ...
Let's say you apply for naturalization (U.S Citizenship) under INA 316, leave the US on 1st January 2022 and return on 2nd January 2023, you will have stayed outside America for a year breaking continuous residence. For such a case, you must wait five years (up to 3rd January 2027) to reapply for naturalization.
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%.
As an American citizen, you're required to file a US tax return even if you're living abroad. And if you already owe income tax to a foreign government, you could end up paying twice on the same income. Here's what you need to know about US double taxation—and how to avoid it.
The exit tax allows former citizens and residents to fulfill their tax duties before permanently removing themselves from the US government's tax jurisdiction. US citizens and long-term residents who the IRS considers “covered expatriates” are subject to this tax.
The 2-out-of-five-year rule states that you must have both owned and lived in your home for a minimum of two out of the last five years before the date of sale. However, these two years don't have to be consecutive, and you don't have to live there on the date of the sale.
If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.
An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).
1. Do expats pay taxes? Yes, you file a U.S. tax return if you're a U.S. citizen and make over the general income threshold — regardless if you live abroad or Stateside.
However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($107,600 for 2020, $108,700 for 2021, $112,000 for 2022, and $120,000 for 2023).
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).
In general, US capital gains are not taxable to nonresident aliens. Rather, capital gains are considered sourced at the location of the Taxpayer. This general rule does not apply to individually owned US real estate by a foreigner, non-resident alien. Individually owned real estate is taxed on the sale as capital gain.
The Foreign Earned Income Exclusion (FEIE, using IRS Form 2555) allows you to exclude a certain amount of your FOREIGN EARNED income from US tax. For tax year 2022 (filing in 2023) the exclusion amount is $112,000.
Especially when the taxpayer resides in a foreign country with a lower cost of living and has amassed a significant amount of non-recognized gains – this is one strategy some taxpayers may qualify to use to pay zero income tax.
The U.S. taxes you on any income you earn, whether it's earned in the U.S. or another country. So if you owned a home or property in another country, and then sold that home for a profit, you'll need to report the sale just as you would if it were located in the U.S.
Key Takeaways. You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly.
While yes, U.S. citizens file a yearly tax return even if they live abroad, U.S. expats don't usually end up owing anything. While there is no overarching tax exemption for U.S. citizens living abroad, there are a variety of mechanisms in place to prevent Americans from being double taxed on foreign-earned income.
If you receive a gift from a foreign individual or foreign estate, you must report it if the total value of the gift exceeds $100,000 during a given tax year.
The most convenient way to maintain a functional U.S. address while living abroad is to use a virtual mailbox service that you can activate online. This service scans, holds, and offers mail forwarding services for a few dollars per month.
To avoid paying capital gains taxes (and any depreciation recapture), you can reinvest in a "like-kind" asset with a sales price of at least $500,000. The IRS allows virtually any commercial real estate property to qualify as 'like-kind” as long as you hold it for investment purposes.
You can't avoid capital taxes by reinvesting in real estate. You can, however, defer your capital gains taxes by investing in similar real estate property.
You might be able to exclude at least a portion of your gain if you lived in your home less than 24 months but you qualify for one of a handful of special circ*mstances such as a change in workplace, a health-related move, or an unforeseeable event.
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.
Introduction: My name is Arline Emard IV, I am a cheerful, gorgeous, colorful, joyous, excited, super, inquisitive person who loves writing and wants to share my knowledge and understanding with you.
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