Tax Tip Tuesday: Tax Impacts of Selling a Home (Both Domestic and Abroad)

Selling a home can mark a major life change — whether you’re upgrading, downsizing, or moving across borders. But before you celebrate, it’s important to understand how the IRS views your gain, especially if your property or mortgage is outside the United States.

Primary Home Exclusion (U.S. Homes)

If you sell your main U.S. home, you may exclude up to $250,000 ($500,000 if married filing jointly) of gain from your taxable income. You qualify if you owned and lived in the home for at least 2 of the last 5 years and haven’t used the exclusion on another home within the past two years.

Example: You bought your home for $400,000 and sold it for $700,000. Your $300,000 gain would be reduced by the $250,000 exclusion (single filer), leaving only $50,000 potentially taxable.

Adjusting Your Basis

Your basis (your investment in the home) includes more than the purchase price. It increases with capital improvements such as new roofs, additions, or solar panels. Tracking these improvements can dramatically reduce your taxable gain.💡 Keep detailed receipts — the IRS can question basis years later.

Depreciation Recapture (Rental or Home Office Use)

If you ever rented the property or claimed a home office deduction, you’ll need to recapture depreciation when you sell. This means the portion of the gain equal to prior depreciation is taxed separately, typically at 25%.

Selling a Home Abroad

U.S. citizens and green card holders are taxed on worldwide income, including capital gains from selling a foreign home. The same home sale exclusion ($250K/$500K) may apply if the foreign property was your main residence and you meet the ownership and use tests.However, foreign transactions add layers of complexity. The IRS requires you to calculate both your purchase and sale prices in U.S. dollars, using exchange rates from each date. Even if your gain in local currency seems small, it can look much larger in USD. You may also owe capital gains tax in the country where the property is located, which can often be claimed as a Foreign Tax Credit on Form 1116 to avoid double taxation. If your foreign mortgage was in another currency, you may have a foreign exchange gain or loss when paying it off. For example, if you took out a €300,000 mortgage when the euro was strong and the euro later weakened before payoff, the difference can create a taxable gain in USD terms — even if your property sale itself broke even. Mortgage currency fluctuations can trigger taxable income under IRS foreign exchange rules (IRC §988), separate from the home’s capital gain.

Reporting and Documentation

You may receive Form 1099-S for U.S. property sales, but for foreign sales, it’s up to you to self-report. File the sale on Form 8949 and Schedule D for capital gains, and include Form 1116 for foreign tax credits if applicable.

When selling real estate — especially abroad — the tax story goes beyond the sale price. Exchange rates, foreign mortgages, and depreciation history can all affect your taxable result. Before closing a deal overseas, consult a qualified tax professional to avoid surprise liabilities. Reach out to info@mkhstaxgroup.com. We help you understand more, stress less, file with confidence.