Some taxpayers own real property located in foreign countries, which can present some unique tax issues and concerns. How do you report taxes to the Internal Revenue Service when you sell a home that wasn't on U.S soil? Maybe you emigrated from that country, and the property was your home before you moved, or maybe you invested there. Either way, you've sold it, and now you must figure out how to include the transaction on your U.S. tax return.
The answer to this tax question is a bit complicated. You'll need a firm understanding of the process while you're still in the planning stage of preparing to sell the foreign property, particularly if you intend to transfer the money to your U.S. bank account.
Reporting the Sale of Foreign Home
You must report the sale of your home, just as you would if it were situated in the U.S.
The United States taxes its citizens on their worldwide income, not just what they earn or collect between its shores.
The Internal Revenue Code provides certain exclusions if the property actually served as your main home. If the real estate was your principal residence, and you lived in and owned the house for at least 24 out of the last 60 months 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 are taxed at a lower rate.
Selling a Foreign Rental Property
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.
There is no exclusion for business or rental property, only for personal residences, but you can deduct costs you incur in maintaining the property and in leasing it out, and you may be able to claim depreciation.
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 can 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.
By reporting your gains and any exclusions on your tax return, you should have sufficient documentation to establish 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.
Frequently Asked Questions
How do I report the sale of my overseas property to the IRS?
Do I have to pay U.S. taxes if I sell a foreign property that I inherited?
Whether the property you own abroad is from your own purchase or from an inheritance, you are responsible for the tax liability that comes from its sale. Sales of inherited foreign properties receive the same tax treatment.