Whether you moved to the U.S. from that country and the property was your home before you moved or you decided to buy a vacation home in another country, if you sold it, you must figure out how to include the transaction on your U.S. tax return. It’s important to understand the process, especially while you’re still in the planning stage of preparing to sell a foreign home or property, and particularly if you intend to transfer the money to your U.S. bank account.
Reporting the Sale of a Foreign Home
The U.S. taxes you on any income you earn, whether it’s earned in the U.S. or another country. So if you owned a home or property in another country, and then sold that home for a profit, you’ll need to report the sale just as you would if it were located in the U.S. The Internal Revenue Code provides certain exclusions if the property actually served as your main home. If the house was your principal residence, and you lived in and owned the house for at least 24 out of the last 60 months (two out of the last five years) ending on the date of the sale, you can exclude $250,000 of capital gains from taxation. This amount increases to $500,000 in capital gains if you’re married and you and your spouse file a joint return. Gains on a primary residence in excess of the exclusion amount will be taxed as long-term or short-term capital gains, depending on how long you owned the property. Long-term gains apply to assets owned for more than a year and may be taxed at a lower rate. If you can’t exclude the gain, use Form 8949 to report the gain from the sale of the home. You’ll also need to fill out Schedule D of Form 1040 with the info on Form 8949.
Foreign Rental Property and Taxes
There may be instances when you sell a foreign home that you don’t live in as your primary residence, such as if the house was used as a vacation home, or if you rented it out as an extra source of income. If the house you sell is a rental property, you’ll have to calculate your gains using the rules for selling rental properties. Another option could be to use the rental property as your primary residence for two years leading up to the sale. This would allow you to take advantage of the $250,000 or $500,000 capital gains exclusion.
Will You Owe Taxes to the Foreign Country?
You might also have to pay taxes on the transaction to the country where the property is located, depending on the tax laws there, but you may be able to catch a tax break here as well. Those taxes can potentially be claimed as a foreign tax credit on your U.S. return. Unfortunately, you can’t claim a foreign tax credit based on any gains you excluded under the provisions of Internal Revenue Code Section 121—the $250,000 or $500,000 exclusions for the sale of your personal residence. If you’re eligible to claim the foreign tax credit, you’ll need to file form 1116.
Other Considerations When Selling a Home in Another Country
By reporting your gains and any exclusions for the sale of property in another country on your tax return, you should have sufficient documentation to show why a significant amount of money was transferred into your U.S. bank account. You should also remember to report any foreign bank accounts you might own on your tax return.
