Owning a house by the beach, in the mountains, or even in the city abroad can be a dream come true. It’s an exciting investment whether you live there full time or it’s a vacation home. However, if you decide to sell that property, you might face an unexpected tax bill. You might be thinking, outside of the U.S.? — Yes, even if it’s located outside of the U.S.
Yes, the IRS does care about your foreign property sales. In fact, U.S. citizens and resident aliens are taxed on their worldwide income–which includes capital gains from selling property abroad. Here’s how it works and how to prepare for it.
What is Capital Gains Tax
Capital gains tax is what you owe on an asset that you sold for more than what you paid for it. The gain is the difference between: Selling Price – Adjusted Cost Bases = Capital Gain
Your “adjusted basis” includes what you initially paid, plus any home improvements, closing costs, and any other qualifying expenses.
Taxes on Foreign Property Though?
Yes, if you’re a U.S. person for tax purposes, you’re required to report capital gains on any property sold — even if it’s in another country. You’ll report this on your federal income tax return using Form 8949 and Schedule D.
Example:
You bought a villa in Spain for $200,000 in 2015. You sell it in 2025 for $350,000. After accounting for $20,000 in renovation costs and $10,000 in closing fees, your capital gain is:
$350,000 – ($200,000 + $20,000 + $10,000) = $120,000
That $120,000 must be reported to the IRS and may be subject to capital gains tax.
Can I Exclude Some of the Gain?
The Home Sale Exclusion
If the foreign property was your primary residence, you might qualify for the Section 121 exclusion. This lets you exclude up to:
- $250,000 of gain (single)
- $500,000 of gain (married filing jointly)
But in order to qualify, you must have:
- Owned the home for at least 2 of the last 5 years, and
- Lived in it as your main home for as least 2 of those 5 years.
If it was a vacation property or rental, this exclusion likely won’t apply to you.
Do I Also Pay Tax to the Foreign Country?
In many cases, yes. The country where the property is located may charge its own capital gains tax when you sell it. But here’s the good news!
You may be able to claim a foreign tax credit using Form 1116 to offset your U.S. taxes. Bonus points to avoid double taxation!
However it’s important to note that not all taxes are eligible for the credit, and exchange rate issues can complicate the calculation–so it’s wise to keep detailed records and consult a tax professional.
Exchange Rates Matter
When reporting foreign transactions to the IRS, you need to convert everything to USD using the appropriate exchange rates on the dates of the purchase and sale. The rates affects the size of your gain and potential tax liability.
Other Considerations
- Depreciation recapture: If you happened to rent out the home at any time, you may have to “recapture” depreciation claimed in prior years and pay tax on it.
- FBAR and FATCA reporting: If you had a foreign bank account connected to the property or large foreign assets, you may also have to file FBAR (FinCen 114) or Form 8938
- Installment sales: If you’re receiving payments over time, the IRS may allow installment sale treatment, spreading the gain over multiple years
Plan Ahead Before You Sell Foreign Property
If you’re not prepared, selling a home or investment property overseas can come with tax surprises. The key is knowing that your your capital gain’s aren’t hidden from the IRS.
If you’re planning to sell (or just wanting to prepare), talk to a tax advisor today about international tax law. A little planning now can save you thousands later!
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