Tax Tips for U.S. Americans Abroad
You’re currently living as a US citizen abroad and it’s time to put up your foreign house for sale. While you work with your real estate agent, you will also need to figure out how to report the sale of your foreign house once tax season hits. You are going to have to do what everyone in the US does when it comes to reporting the sale of your home – with a few unique points since the home is not on US soil.
Getting a solid understanding of how to plan and prepare the selling and reporting of your foreign home while living abroad as an American is important. Here is what you need to know:
Your Foreign Home Sale
Americans abroad are not in the clear when it comes to reporting worldwide income to the IRS. The US taxes its citizens no matter where they are located in the world. This also goes for reporting the sale of your home, whether abroad or in the states itself.
According to the IRS, as an American abroad, you can receive specific exclusions of your foreign property. This is similar to your peers back home.
You may be qualified to deduct up to $250,000 of a capital gain you received from the sale of your foreign home. Or, you could exclude up to $500,00 of that capital gain if you are married and you and your spouse file a joint account. This is especially true if you have lived and owned your property within two out of the five years.
If you didn’t live on the property and it wasn’t a primary residence, the sale is subject to standard capital gains tax rates. For taxpayers, the tax rate for the most net capital gain will be between 15% to 10%. It depends on the amount. Additionally, your capital gain may be eligible for 0% tax. This is so, as long as it falls within the 10-12% income tax bracket.
Capital Gains and Sale on Foreign Home
As we explain in our Capital Gains Tax post, a capital gain is a certain profit you make from the sale of property or investment. You can see it as money you gain when you subtract the property’s purchase price and additional costs along the way from the sale price. Therefore, if you sell your foreign home higher than what you originally invested in it, you’ll get a capital gain:
Home Sale Price + Any Additional Costs (ie: renovation, repairs, etc) – House Purchase Price = Capital Gain.
Any foreign home that gets sold and produces a capital gain is taxable for the IRS. Meaning, even if it’s activity outside of the US, as long as you are a US citizen selling foreign property, and gaining additional profit out of it, the IRS needs to know about it.
Any and all gains on your primary residence as an American abroad that is more than the exclusion amount, if applicable, will be taxed. This is especially according to whether its a long-term or short-term gain. It depends on how long you’ve owned the foreign property. Long-term gains apply only to property owned for more than one year and will be taxed at a lower rate.
Additionally, if the foreign home was a rental property, you’ll need to calculate your gains by following the rules for selling rental property. The exclusion goes only for personal residences, not a business. Yet you could reduce costs from maintaining property and leasing it out, plus could claim for wear and tear – depreciation.
How to Report Sale of Foreign Home
As an American abroad, you’ll need to be responsible for your capital gains and fill out:
- Form 1040, Schedule D – Capital Gains and Losses
- Form 8949: Sales and Other Dispositions of Capital Assets.
Make sure to convert your foreign income into US dollars! What helps in calculating your capital gain into US dollars is looking at the exchange rate that was active at the time you purchased your property, and sold the property.
However, if the thought of doing paperwork to report the sale of your foreign home is tiring you out already, head on over to our app and our software will do it for you!
Taxes on Foreign Property
You may be wondering if you as a US expat need to pay taxes on any transactions to the country in which your property is located. It depends on the tax laws in your host country. Overall you could take advantage of tax benefits like the Foreign Tax Credit. This can be claimed on your US tax return.
However, you cannot claim the foreign tax credit from gains you excluded under Code Section 121 of the Internal Revenue Code. This is the $250,000 or $500,00 exclusion threshold for the sale of your personal property.
It’s true that every country has its own tax rules and laws. Plus, they may treat capital gains taxation differently. Your host country may waive capital gains, or take a portion of your property’s profit you made selling it. Be sure to double-check with your local tax authority for additional guidance and support.
If you did pay foreign tax on any overseas property as a US citizen living abroad, you will need to track this amount yourself. As most likely, you will NOT receive a 1099-INT statement, 1099-DIV, or other 1099 form stating the amount of foreign taxes paid on your sale.
We Got You Covered at MyExpatTaxes
To report sale of foreign home as an American expat can be complicated. Fortunately, our expat tax software can make the entire process simple and affordable. Filing US taxes will never be simpler. Plus, tax preparation will become a whole lot smoother. Just sign up via our app and let’s get started.
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