Tax Tip Tuesday: Capital Gains Tax on Foreign Real Estate

Selling property abroad? Don’t forget that the U.S. taxes you on worldwide income — including capital gains from foreign real estate sales.

Here’s what you need to know:

• Report the Sale on Your U.S. Return: Even if you already paid tax in the foreign country, you still need to report the sale on Schedule D and Form 8949 of your U.S. return.

  
  

• Use the Correct Exchange Rate: Convert both your purchase price and sales price into U.S. dollars using IRS-accepted exchange rates (yearly average or transaction-date rates).

  
  

• Foreign Tax Credits May Reduce Your U.S. Tax: If you paid tax abroad on the gain, you may be able to claim a Foreign Tax Credit (Form 1116) to avoid double taxation.

  
  

• Capital Gains Exclusion for Primary Residence Still Applies: If the property was your main home for 2 of the last 5 years, you may exclude up to $250,000 ($500,000 if married filing jointly) of gain — even if it’s overseas.

  
  

• Watch Out for Foreign Currency Fluctuations: Currency gains (or losses) may affect your taxable gain in USD — even if you sold for the same amount in local currency.

  
  

• Document Everything: Keep closing statements, proof of improvements, foreign tax receipts, and exchange rates for at least 3 years (longer if you claim a foreign tax credit).

  
  

💡 Bottom Line: Selling foreign property can trigger U.S. capital gains tax, but careful reporting and use of foreign tax credits can reduce or eliminate double taxation. If you need help with reporting your foreign real estate sale, contact us at info@mkhstaxgroup.com.