U.S. Tax: American Selling A Principal Residence At Home Or Abroad

When selling a principal residence, American homeowners can exclude up to $250,000 in gains, or $500,000 for married couples filing jointly. This exclusion applies to homes sold both within the U.S. and overseas, if specific criteria around ownership and use are met.

For U.S. persons (including green card holders) living abroad, there are additional considerations, particularly when it comes to the timing of the sale and meeting residency requirements. This article explores the rules in greater depth, including partial gain exclusions for sales that don’t meet all the requirements, treaty considerations and other issues often faced by expats.

An area of confusion arises with home ownership when a taxpayer is living and working abroad. Overseas Americans are entitled to certain tax breaks assuming various qualifications are met. One of the significant tax breaks is the ability to exclude from taxable income certain amounts provided by an employer for foreign housing. Expats who own a home overseas and receive housing amounts from their employers often mistakenly believe they can still claim the exclusion even if they are not paying rent. Unfortunately, home ownership costs do not qualify but employer paid amounts used for mortgage interest and foreign real property taxes may possibly be eligible.

Ownership And Occupancy Requirements

To qualify for the gain exclusion on sale, a property must have been both owned and occupied by the taxpayer for at least two years (730 days) during the five-year period leading up to the sale. These two years don’t have to be consecutive, but the cumulative time must meet the threshold.

Additionally, the exclusion can only be applied to the sale of one property every two years. If multiple homes are owned—whether stateside or abroad— and if the taxpayer has alternated living between two properties, it will be important to choose carefully when planning to sell and exclude gains.

Special Situations For Expats: Entity Ownership

Americans living overseas often hold real property through foreign corporations, foundations or trusts, especially in jurisdictions with complex inheritance laws. This can complicate the ability to exclude gains. When a corporation or trust owns the property, the Section 121 exclusion typically does not apply, as a corporation can’t satisfy the ownership and occupancy tests. If the property is held in a trust (or a foundation treated as a trust for tax purposes), a taxpayer might still qualify for the exclusion, but only if they are considered the “tax owner” of the trust and meet the occupancy requirements. Experienced tax advice is required when using foreign structures for any purpose, including for holding the principal residence.

Selling The Home – Timing Is Critical

For U.S. expatriates, timing is everything when selling the principal residence. To qualify for the full gain exclusion, the principal residence must be sold within five years of moving out. If the taxpayer has been overseas for longer than that, the home left behind in the U.S. may no longer meet the residency requirement.

For example, let’s consider an expatriate couple who moved abroad in 2013 but retained their home in the U.S., hoping to return someday. By 2017, they’ve decided to sell the property and while still residing overseas, the deal closes in 2018. They no longer meet the 730-day residency rule within the five-year period ending on the sale date, and accordingly they can’t exclude the gain.

Partial Gain Exclusion: Health, Job Relocation, Unforeseen Circumstances

What happens if unforeseen circumstances force an early sale of the home before meeting the ownership or use requirements? The tax law does allow for a partial exclusion of gains in certain cases, such as a job relocation, health issues, or other unforeseeable events.

For expatriates, losing a job overseas, being offered a better opportunity in another country, or even a sudden deterioration in local living conditions could qualify for a partial exclusion. The IRS has laid out specific safe harbor situations, such as divorce, illness, or a disaster that damages the home, that permit taxpayers to automatically qualify for a partial exclusion. If the situation doesn’t meet these exact safe harbors, the IRS may still allow the exclusion based on the “facts and circumstances” of the case. Taxpayers can always request a private letter ruling from the IRS when greater certainty is required, but this process is both time-consuming and costly.

A move prompted by health concerns could also qualify for a partial exclusion. For instance, if the primary reason for selling a home is to obtain medical treatment, the law allows a prorated exclusion of the gain. As always, reviewing the specifics with a tax professional is essential to get the best tax result and ensure compliance.

Sale of Principal Residence – IRS Reporting Requirements

For taxpayers who sell a principal residence and exclude the entire gain, no additional reporting is required unless they received Form 1099-S, Proceeds from Real Estate Transactions. If part of the gain exceeds the exclusion limits, or if the case is ineligible for the full exclusion, the taxpayer must report the sale on Form 1040 (Schedule D) and Form 8949. If the sale of the home results in net investment income, the taxpayer may also be subject to the Net Investment Income Tax.

The IRS lays out some of the rules for reporting the sale of one’s home and more detailed information can be found in IRS Publication 523.

Sale of Principal Residence – Final Thoughts For U.S. Expats

The sale of a principal residence as a U.S. expatriate may involve unique challenges. Beyond the ownership and use requirements, holding property through foreign entities and timing the sale to meet the exclusion deadlines adds layers of complexity.

In addition, foreign taxes must not be overlooked. Tax treaties between the U.S. and other countries can affect the taxation of capital gains, potentially reducing or eliminating foreign taxes on the sale of a home. Treaty benefits vary by country. Expats must be mindful that the U.S. still taxes its citizens on worldwide income, including capital gains from foreign property sales. Understanding both U.S. and foreign tax obligations, as well as claiming available treaty benefits, can help minimize double taxation.

Consulting a tax advisor who understands both U.S. and international tax law issues is critical to making the most of the particular taxpayer’s situation when selling the principal residence.

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