Capital gains taxes from selling foreign property: how to report and exclusions you can use

Income you receive as a US citizen is taxable. Most of the time people focus on income from salaries and wages, because it’s the most obvious — and regular — type. However, there are other forms of income, such as passive income (e.g. dividends and bonds) and income you receive from selling your assets.

These assets come in many forms, with property being one of the most sizable. If you made a profit from selling your house, even if it’s abroad, by default you should pay taxes from this profit, as an American citizen. This concept is called capital gains tax on foreign property.

Below we’ll delve into the matter. What capital gains tax is all about, how you need to report it, and which tools exist to reduce or altogether exclude it.

How capital gains will be reported on your tax return

It will be reported as income — if you made a profit, of course — and hence it is taxable. Gains from selling property abroad are also taxable, because the US taxes their citizens on worldwide income.

Capital gains from selling property are easy enough to calculate: You just need to know the purchase price, the selling price, and the cost of any improvements you’ve made to the property while it was in your possession. 
 

Selling price — (purchase price + improvement costs) = capital gains.

However, after that, you still need to iron out a few details:

• Apply exchange rates for property sold abroad in currency other than US dollars. The number on your return should be in US dollars.
• Determine whether your capital gains are long-term (if property was held over a year before being sold) or short-term (less than a year). Long-term gains are taxed at a reduced rate (20% max), while short-term gains are taxed the way your regular income is treated (up to 37%).
• Report your capital gains: File your regular 1040 form (schedule D), as well as form 8949.
• Comply with FATCA and/or FBAR requirements. The former dictates you should report any financial assets exceeding $50,000 at the end of the year (or $75,000 during any part of the year). The latter requires you to report foreign bank accounts you have with a total balance over $10,000. Selling property will most likely get you over at least one of these numbers.

How to avoid capital gains tax

While income is taxable by default, there are still thresholds to cross and benefits to claim before you rush out to file the paperwork. Here’s what you should keep in mind when handling foreign capital gains from selling property.

Exclude gains on your principal residence

If you are selling your home abroad, a sale under $250,000 is not taxable. This number goes up to $500,000 if you are married and file jointly with your spouse. 

However, to be considered your main residence, you must have owned it and lived in it for at least 2 out of 5 years before selling. But these 24 months don’t have to be consecutive. Also, the exclusion is not a one-off: You can use it every two years.

Leverage Foreign Tax Credit

You are selling abroad — which means you most likely own taxes from the sale to a foreign country. It doesn't seem fair to also pay taxes in the US, does it? That’s where foreign tax credit for capital gains comes in: You can reduce your US taxable income dollar-for-dollar, meaning you only pay capital gains taxes once — in the country of origin. Foreign tax credit only applies to situations when selling property, mind you, not other income types.

Take advantage of tax treaties

Foreign tax credit is a complicated concept, one that also deals with double taxation. 

Naturally, a question pops up: Doesn’t the US have international treaties in place to avoid double taxation?

Yes, it does. There are such treaties in effect with 68 countries around the world. These include popular destinations for US expats, such as the UK, Canada, Australia, France, and Germany. If there’s no treaty in place with the country you are selling your property in — or the treaty in effect doesn’t cover capital gains — feel free to use a Foreign Tax Credit.

Use like-kind exchange capital gains deferral

The like-kind exchange is also known as 1031 exchange. That’s an IRS provision which allows individuals and businesses to defer paying taxes on capital gains they made from selling property — provided these gains were reinvested in acquiring another piece of property. There’s a very restricting stipulation that goes with this provision, however: The property you buy has to be for investment or business purposes. So a personal residence won’t do.

Hold for long-term gains

We’ve briefly mentioned this above, but just to reiterate: If you hold onto your property for over a year before selling, your gains will be considered long-term — and taxed at a maximum 20%, depending on your income level and filing status. 

Selling property less than a year after the purchase means your gains are short-term — and the tax rate might go up to 37%, again, depending on your income.

Check the table below to find out which rates apply for long-term gains.

Rely on a trust or other legal entity

You can hold foreign property not as an individual, but through a trust or another legal entity. This route can offer tax advantages when reducing or deferring capital gains — among other benefits. This is not a straightforward procedure, however: You’d do well to consult with a foreign tax expert before going down this road.

Conclusion

When selling property abroad, you should be mindful of capital gains tax. As a US citizen, your worldwide income is taxable — and selling a piece of property will be considered as income.

To report the sale of property you will need to file Form 8949 and a 1040 Schedule D. You should also determine whether your gains are considered short-term (if property was in your possession under a year) or long-term (over a year). Your tax rates will depend on it. 

Finally, convert the income you get in foreign currency into US dollars, and be mindful of complying with FBAR and/or FATCA requirements.

However, if you sell a piece of property abroad, it does not automatically mean you must pay taxes from the profit you made. If the property was your main residence and was sold under $250,000 dollars, you don’t need to report capital gains. You can also check whether the country you are selling the property in has a tax treaty with the US, leverage Foreign Tax Credit rules if no treaties exist, use a tax deferral, hold out for long-term gains to reduce taxation rates — or even purchase the property through a fund in the first place.

If navigating capital gains taxes and reporting rules sounds a bit too much, drop us a line. We’ll be happy to handle any reporting questions — and can even negotiate with the IRS on your behalf.