Whether you live overseas and are returning home to the U.S. or want to sell a rental or vacation property in another country, it’s essential to be aware of tax laws and other considerations before selling your overseas home. Here’s a list of what you should keep in mind.
Tax Considerations for Overseas Property Sales
Like a domestic property sale, any gains you receive as a U.S. citizen from selling an overseas property are taxable, the same as any domestic real estate deal. You must report all overseas property sales and pay required taxes according to the tax code.
The good news? If you live or once lived overseas and are now selling your primary residence in another country, any gains will enjoy the same tax benefits as if you sold your primary residence in the U.S. And if you used the overseas home as your primary residence for at least two out of the past five years, you can exclude $250,000 of capital gains from taxation or a total of $500,000 if you are married and file jointly.
Any gains above those thresholds will be taxed at the short-term or long-term capital gains rate. That’s determined by whether you owned the property for a year or more.
What if you’re selling a rental property or a home you used as a vacation escape? Then the tax laws are somewhat different. First, you’ll need to determine your cost basis on the property, including the purchase price and related costs (such as real estate commissions) and any funds you paid to improve the property, along with selling costs and depreciation. You then subtract the total of that cost basis from the selling price to determine any profit.
If the sale results in a profit, those gains will be taxed partly as depreciation recapture, with the rest as capital gains, which depend on your income. Depreciation recapture is how the IRS collects taxes on the gain from selling a property and recovers any benefits you enjoyed from offsetting your taxes through depreciation.
In addition to taxes paid on your U.S. return, keep in mind that you may have to also pay taxes to the home country where the property is located. But that doesn’t mean you’ll face double taxation: if you must pay taxes to the foreign jurisdiction, you will be eligible to take a foreign tax credit on your U.S. tax return. However, note that you won’t receive a foreign tax credit for any gains you excluded under the $250,000 or $500,000 capital gains exclusion.
For property investors, the 1031 like-kind exchange allows owners of domestic investment properties to sell the property and then invest the proceeds in another “like-kind” investment property, deferring any federal income taxes in the process. Owners of foreign properties can also use a 1031 exchange, but only for another overseas property. Similarly, you can’t sell a property in the U.S. and then use a 1031 exchange to shelter those gains by buying a property overseas.
When filing your taxes, report proceeds as income on your tax return using Form 8949, and include capital gains and losses on Schedule D portion of Form 1040.
Tax laws and rules around overseas ownership and property sales vary from country to country. The U.S. embassy in the country where your property is located can help you decipher the local property and tax laws as you prepare to sell.
Selling An Inherited Property
What if you inherited an overseas property and want to sell it instead of renting out or using it yourself? Then the tax details differ somewhat.
The value of the inherited foreign property will receive a step-up basis, which is the fair value of the property on the date the original owner died or the date the property passed to you. Your capital gains would then be based on any income you receive from the sale from that “stepped-up” basis converted to U.S. dollars, assuming the property rose in value.
For example, say your uncle bought a home overseas for $100,000, which then rose in value to $500,000 in 2022. If he passes away this year and leaves the home to you in his will, you won’t have to pay taxes on the $400,000 in appreciated value. That step-up basis helps minimize the capital gains taxes owed by heirs when they sell inherited properties.
The Bottom Line
Given the additional complexities in selling overseas property, you likely shouldn’t go through it alone. Consult with your tax advisor and financial advisor is crucial as you first consider and ultimately go through with an overseas property sale.
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