If you are a US citizen living outside the United States, under US tax law, you could be subject to US capital gains tax on the sale of your non-US home. It doesn’t matter where the sale of the home is in the world, or if you paid local tax in your country of residence when you bought or sold the property, it is still subject to US capital gains tax due to US citizens being subject to US taxation regardless of where they live in the world. That said, there are legal ways for you to reduce or eliminate US tax due on the sale of a home.

This is one of the top questions that I receive, and it’s a common question because many countries outside the US will tax homebuyers at the time of purchase of a home, rather than when the property is sold (often called a stamp duty). While many countries will tax at the time of purchase, the US only taxes at the time of sale. This is not an issue for people living within the US because they are only taxed at the time the home is sold. But for Americans living abroad, we are subject to both tax within the country we reside in as well as US taxes, so when it comes to the sale of a non-US home, a US citizen residing outside the US could end up paying local tax when they buy the property and then US tax when they sell, which makes it feel like double taxation. This can become particularly problematic for people who aren’t aware of the tax implications on the US side during the sale process. But with some simple advanced planning, it’s possible to avoid running into unknown or surprise US tax when you sell.

By the way, it is totally legitimate for you to ask how to reduce your US tax liability; you shouldn’t feel ashamed to ask about this. Remember, you have a right to pay the least tax possible to the IRS. Tax avoidance is legal, while tax evasion is illegal. You are asking the right question to help you legally reduce your tax liability. Many people buy a house with the intention of selling it in old age to live off of the sale of the house for their retirement or to pass the money from the sale on to their children or grandchildren. You have a right to every penny you earn from the sale of your home, do not feel ashamed about that either.

Here are a few ways which you can use to legally reduce or eliminate your US capital gains tax liability to the IRS. Keep in mind that you could use all, one, or a combination of these to reduce or eliminate your US tax liability on the sale of your home.

Home Sale Exemption

There is an exemption that will allow you to exempt up to $250,000 of the gain if filing single or married filing separately or up to $500,000 if filing jointly. For example, if you bought a house for $50,000 and sold it for $300,000, you’d have a gain of $250,000. If you lived in the house for 2 out of the last 5 years, you qualify for the exemption and wouldn’t owe any US capital gains tax. But if you bought a house for $50,000 and sold it for $500,000, you’d have a gain of $450,000 and be subject to US capital gains tax on $200,000 (after the $250,000 exemption).

There are ways of increasing your exemption, so if you have a non-US spouse you could decide to file jointly and therefore then receive the $500,000 exemption to avoid the US capital gains tax all together. Keep in mind, you will need to still report the sale of the home on your US tax return in order to qualify for this exemption.

Gift Home to a Non-US Person

Another common method of avoiding US capital gains tax is to gift the home to your non-US spouse or any non-US person that you trust before selling. This would mean that you don’t have to do any reporting and are not subject to any US capital gains tax to the US since you wouldn’t own the property at the time of the sale.

You may want to consult with a local accountant or lawyer in your country of residence to make sure you follow local laws around gifting property. You might be subject to local tax or paperwork requirements that will cost money to gift a home in your country of residence, so you will want to weigh up the pluses and minuses of going through this process to avoid the US capital gains tax when the property is sold.

You should also watch out for the US gift tax, there is a lifetime limit and annual limit, although most people don’t exceed the amounts that trigger tax, but you may be required to report the gift if it’s over a certain amount in a particular year. If your spouse is not a U.S. citizen, the marital deduction for gifts is limited to an annual exclusion of $164,000 for 2022, $175,000 for 2023, and $185,000 for 2024. So you may want to make a plan to gift to your non-US spouse over a period of time if you want to use this method.

Foreign Tax Credit

If you do end up paying capital gains tax in your country of residence on the sale of your home, then you can use the foreign tax credit to reduce or eliminate your US capital gain tax liability. It will depend on your personal circumstances if you are able to use the foreign tax credit, but it’s an option worth considering. This option is also available for investment properties as well, so not just for the sale of your home.

Additionally, if you are in a country where tax is higher than the US, then you could potentially carryover up to 10 years worth of unused foreign tax credits to reduce or eliminate your US capital gains tax liability on the sale of your home.

The Fine Print

I wish it went without saying, but do keep in mind that this blog post is for general information and should not be taken as advice or guidance for your personal circumstances. Everyone’s situation is different, and advanced planning is key to avoid any surprise tax bill when you go to sell your home. Be aware of your specific circumstances before making any decisions to purchase or sell a home and/or how to proceed with filing your US tax return. As is always the case, you should always seek professional advice for your specific circumstances or consult the IRS website and official IRS resources for information.

Have a Suggestion to Improve IRS Processes or Customer Service?

If you have a suggestion on how the IRS can improve processes or customer service for people living outside the United States with a U.S. tax obligation, please consider submitting a suggestion on the Taxpayer Advocacy Panel’s website here.

About the Taxpayer Advocacy Panel

The Taxpayer Advocacy Panel is a United States Federal Advisory Committee whose mission is to listen to taxpayers, identify taxpayers’ issues and make suggestions for improving IRS service and customer satisfaction. TAP is comprised of approximately 75 members who volunteer to serve a three-year term, and represent all 50 states, District of Columbia, Puerto Rico and a member to represent U.S. Citizens living or working abroad.

About the International Member of the Taxpayer Advocacy Panel

I am originally from Ohio, went to college in Wisconsin, and moved to London, United Kingdom to do my masters and upon completion was offered a job, and so I stayed. 16 years later, I am married to a Brit, run a UK company, and volunteer to help Americans abroad in tax advocacy work. My three-year Taxpayer Advocacy Panel term started in 2022. I serve on the Special Projects Committee for TAP, which is the committee that handles international issues within the IRS. I am not an accountant, which makes me a minority on TAP, in addition to being the only member on TAP not in the United States, my unique perspective helps bring clarity to the issues, prioritize problems, and provide solutions.

Contact Rebecca on tapinternational1@gmail.com

Article by Rebecca Lammers from Medium