Tax implications for selling property overseas
US tax credits may help mitigate double taxation on foreign property.
If you’re a US citizen or resident who owns or sells property overseas, you not only need to know foreign tax policies, but you also need to report the sale on your annual US tax report. Know the ins and outs of reporting foreign capital gain to make sure you file on time and without discrepancy.
If I sell a property overseas, will I need to pay taxes in the US?
When you sell a property overseas, you’re responsible for capital gains taxes — or taxes you owe when you sell a property for more than you paid for it.
You must report any capital gains on Form 1040, Schedule D in USD. Calculate your capital gains by looking at the exchange rate active at the time you purchased the property and the rate at the time you sold the property. It also depends on what type of foreign property you own.
Calculating capital gains tax on your foreign home
If you lived in the residence for at least two out of the last five years, the property is considered a primary residence and you may qualify for a $250,000 deduction, ($500,000 for married couples) from any gain you had on the sale of the property.
Calculating capital gains tax on your foreign rental property
If your foreign property isn’t your primary residence, it’s considered an investment and is subject to standard capital gains tax rates.
According to the IRS, the tax rate on net capital gains is no more than 15% for most taxpayers. In fact, some or all of your capital gains may be eligible for 0% tax if you fall within the 10% to 12% ordinary income tax bracket.
How to report the sale of your foreign property
You may not receive any statements or forms regarding the sale of your property or interest made — such as 1099-INT or 1099-DIV — so you’ll need to document the sale and keep a close eye on the amount you made so you can report it. There are three forms you’ll need to fill out when reporting the sale of your foreign property:
- Form 8949. You’ll start off by reporting the short- or long-term sale of your capital asset on Form 8949. Once you’ve filled out this form, you’ll use the information to fill out Schedule D.
- Schedule D. This is the form where you calculate your capital gains and losses for the year. It requires you to add information found on Form 8949.
- Form 1040. Finally, you’ll take the capital gains amount from Schedule D and add it to your main tax form, which is Form 1040. Be sure to attach Schedule D to this Form, so the IRS gets it.
When filling out these forms, you’ll need to use the active exchange rate at the time of purchase and the time of sale. If you can’t recall the active exchange rate, you can look it up using a historical currency table.
Do I have to report my foreign property to the IRS?
It depends. While a foreign home isn’t considered a reportable foreign asset under FATCA, a foreign bank account is. So, if you sell your home and put the money in a foreign bank account, it could trigger FATCA if the amount is above a specific threshold. In this case, you’ll need to report your foreign account on Form 114 and possibly Form 8963 to agencies such as FinCEN.
Will I need to pay taxes where the property is located?
Every country has its own tax laws and will treat the taxation of capital gains differently. Some countries waive capital gains tax for foreign investors, while others will take a portion of any profit made on an investment property.
If you’re unsure about property and tax laws, contact the US embassy in the country you’ve purchased your property for further guidance and instruction.
If you’ve paid foreign tax on an overseas property, you should receive a 1099-DIV or 1099-INT payee statement. The earnings withheld by the foreign government will appear in Box 6.
Will I be taxed twice?
US citizens are responsible for reporting all capital gains on foreign real estate and may be taxed on those gains depending on the nature of the overseas property. Foreign properties may also be subject to the tax laws of the country they’re located in, which means you could potentially be taxed twice on the same property.
The IRS offers a potential solution for double taxation in the form of foreign tax credits and deductions. To claim the foreign tax credit, you must file Form 1116, Foreign Tax Credit.
Six steps to selling property abroad
Sell a foreign property overseas in person or remotely using these simple steps:
1. Choose the right time to sell
As with any investment, you’ll want to sell at a time when you can maximize profits. But pinpointing the right time to sell is a little more complicated when you’re dealing with an overseas property. You’ll want to examine factors such as exchange rates, housing market conditions and even the time of year when deciding when to put your property up for sale.
2. Work with a real estate agent
If the thought of selling foreign property overseas has your head spinning, hire a professional to help you out. Working with a real estate agent has its perks. For instance, they can:
- Evaluate your property to make sure it’s accurately priced
- Offer recommendations on how you can make your property attractive so it sells quickly
- Take enticing photos of your property to showcase it’s best features online
- Arrange viewings and negotiate the price with buyers
3. Prepare your documents
Make sure you gather up your property’s title deed, Land Title Registry and any other documents proving you have no outstanding tax or utility debts. If you choose to work with a realtor, they’ll help you collect this information.
4. Wait for someone to make an offer
Waiting is often the hardest part. Be patient as your realtor arranges viewings and advertises your home. Now is a good time to make sure your home is looking its best. Add a vase of fresh flowers, remove excess clutter from your house and keep it looking tidy.
5. Sign the sales contract and pay any fees
Once someone makes an offer, it’s time to sign the purchase and sales agreement. Once everything is finalized, you’ll pay the realtor’s commission or fees and wait for ownership to be fully transferred to the new owner.
6. Report your sale to the IRS
The last step is to pay the capital gains tax on your foreign property and report the sale to the IRS and the foreign country’s government if required. It’s best to work with a tax professional or use an online tax software to report the sale.
As a US citizen living in the US or abroad, capital gains from property sales are subject to US tax law. Avoid double taxation by filing for a foreign tax credit or deduction.
When moving money worldwide, explore your options with multiple providers to get the best service for your needs.
Frequently asked questions
Do I need to report the purchase of my overseas property?
You aren’t required to report the purchase of foreign property, but it’s wise to retain all documentation from the purchase when it comes time to sell the property and declare the sale on your tax return.
I own a rental property overseas. How do I report this?
Rental income is declared on your annual federal tax return on Form 1040, Schedule E. Management fees, property taxes, utilities, property maintenance and insurance are all deductible expenses.
Is it better to file for foreign tax credit or deduction?
Each year that you pay any qualifying foreign taxes, you have the option of filing for a foreign tax credit or deduction. The IRS suggests that it’s more advantageous to select the credit over the deduction, as the credit reduces your US income tax on a dollar-for-dollar basis and allows you to carry over accrued excess taxes paid to another tax year.
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