US Taxes on Foreign Property: Your Guide to Buying and Selling Real Estate Abroad

If you’re an American who has purchased property abroad or you’re considering selling your overseas home, the complexity of US tax rules can feel overwhelming. You might be wondering: Do I owe taxes when I make a purchase? What happens when I sell? Will I be taxed twice? The good news is that with the right knowledge and planning, most expats keep the majority of their profits.

According to the IRS, most American property owners abroad end up owing little to no US tax when they sell, especially after applying the Foreign Tax Credit for taxes already paid to foreign governments.

Do U.S. Citizens Have to Pay Taxes on Foreign Property?

Generally, no. Just owning foreign real estate does not trigger a U.S. tax liability. However, US citizens are subject to tax on any income (such as rent) or capital gains (profit from selling) the property generates. Additionally, while the property itself is not reportable, financial accounts used to purchase or maintain the property may trigger FBAR or FATCA reporting requirements.

Quick Reference: Tax Impact by Activity

Activity	Taxable Event?	Reportable to IRS?	Key Form(s)
Buying property	No	No	None
Owning property	No	No*	FBAR/Form 8938 (if accounts exceed thresholds)
Earning rental income	Yes	Yes	Schedule E
Selling property	Yes (on gains)	Yes	Schedule D, Form 8949
Selling primary residence	Potentially exempt up to $250K/$500K	Yes (if gain exceeds exclusion)	Schedule D, Form 8949

*The property itself isn’t reportable, but related bank accounts may be.

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Do I Have to Report Foreign Property to the IRS?

No. Purchasing or owning foreign property doesn’t require reporting on your US tax return. However, related financial activities might:

FBAR Requirements

FBAR (FinCEN Form 114): Required if the combined total of all your foreign financial accounts exceeds $10,000 at any time during the year. This includes accounts opened to purchase property or collect rental income. Deadline: April 15 (automatically extended to October 15).

FATCA Requirements

FATCA (Form 8938): Required if you own property through a foreign corporation, trust, or other entity, and your foreign financial assets exceed these thresholds:

Living abroad (single): $200,000 on last day of year or $300,000 any time during year
Living abroad (married filing jointly): $400,000 on last day of year or $600,000 any time during year

Foreign real estate itself is not a reportable asset under FBAR or FATCA, but the accounts used to purchase or manage it may be.

Can I Deduct Mortgage Interest on Foreign Property?

Yes. US taxpayers can deduct mortgage interest on foreign property if it qualifies as a primary or secondary residence:

Interest is deductible on up to $750,000 of mortgage debt ($375,000 if married filing separately)
Property must be your primary residence or second home
Interest must be paid to a legitimate lender

This follows the same rules as domestic property, as outlined in IRS Publication 936.

How Are Capital Gains Taxed When I Sell Foreign Property?

Capital gains from foreign property sales are taxed based on how long you owned the property:

Long-Term Capital Gains (Held More Than One Year)

0% rate: Income up to $48,350 (single) or $96,700 (married filing jointly)
15% rate: Income $48,351-$533,400 (single) or $96,701-$600,050 (married)
20% rate: Income above these thresholds

Short-Term Capital Gains (Held One Year or Less)

Taxed as ordinary income at rates from 10% to 37%.

Additional Tax Considerations

High-income taxpayers may also be subject to the 3.8% Net Investment Income Tax if their modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).

Important

Currency exchange rates can create taxable gains even if you didn’t make a “real” profit in the foreign currency. You must convert the purchase price, improvements, and sale price to USD using the exchange rates applicable to the transaction dates.

Can I Exclude Gains From Selling My Primary Residence Abroad?

Yes. The Section 121 principal residence exclusion applies to foreign properties just as it does to US properties.

Exclusion Amounts

Single taxpayers: Up to $250,000 of capital gains
Married filing jointly: Up to $500,000 of capital gains

Requirements

Ownership test: Owned the home for at least 2 years out of the 5 years before the sale
Use test: Lived in the home as your primary residence for at least 2 years out of those 5 years
The 24 months don’t need to be consecutive
You can use this exclusion every 2 years (no lifetime limit)

Example: David and Lisa bought a home in Ireland in 2019 for $225,000. They lived there as their primary residence until selling it in 2026 for $540,000. Their $315,000 gain falls entirely within the $500,000 exclusion, so they owe zero US capital gains tax.

How Does the Foreign Tax Credit Work with Foreign Property Sales?

The Foreign Tax Credit prevents double taxation on foreign property sales:

Pay capital gains tax to the foreign country
Report the gain on your US return (Form 8949 and Schedule D)
Claim a credit for foreign taxes paid (Form 1116)
The credit reduces your US tax dollar-for-dollar

The credit is limited to the US tax you would have owed on that income. Excess credits can be carried forward for up to 10 years.

Example: Robert sold Australian property with a $100,000 gain. He paid $18,000 in Australian taxes. His US tax would be $15,000 (15% bracket). Using the Foreign Tax Credit, his US tax owed is $0, with $3,000 to carry forward.

Do I Pay US Taxes on Foreign Rental Income?

Yes. Rental income from foreign property must be reported on Schedule E (Form 1040), just like US rental properties. The Foreign Earned Income Exclusion does NOT apply to rental income because it’s passive income, not earned income.

Deductible Expenses

Property taxes paid to the foreign government
Mortgage interest
Depreciation (30-year schedule for foreign residential rental property)
Maintenance and repairs
Property management fees
Insurance and utilities

You can use the Foreign Tax Credit to offset US taxes with foreign taxes paid on the rental income.

For detailed guidance on reporting requirements and maximizing deductions, see our article on Foreign Rental Income Tax: Reporting Rules & Deductions.

What Forms Do I Need to File?

Form	Purpose	When Required
Schedule E (Form 1040)	Report rental income and expenses	Any rental income from foreign property
Schedule D (Form 1040)	Report capital gains/losses	A sale resulting in a gain or loss
Form 8949	Detail property transactions	Required with Schedule D for sales
Form 1116	Claim Foreign Tax Credit	Foreign taxes paid on rental income or sale
FBAR (FinCEN Form 114)	Report foreign accounts	Accounts exceeded $10,000 at any time
FATCA (Form 8938)	Report foreign assets	Assets exceed thresholds

Do I Pay State Taxes on Foreign Property?

It depends on your former state of residence. Even if you live abroad, you may still have state tax obligations:

States That May Tax Foreign Property Gains

California, New York, Virginia, and other “sticky states” may tax worldwide income, including foreign capital gains, if you haven’t properly severed residency.

States With No Income Tax

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming

Simply moving abroad doesn’t automatically end state tax obligations. You must take specific actions to terminate your residency.

For detailed guidance, see our article on state taxes for expats.

How Can I Minimize Tax on Foreign Property?

Five Key Strategies

1. Hold Property for at Least One Year: Qualify for long-term capital gains rates (significantly lower than short-term rates)

2. Document All Improvements: Renovations, additions, and significant upgrades increase your basis and reduce taxable gain

3. Time Your Sale Strategically: If you’re close to meeting Section 121 exclusion requirements, consider waiting

4. Leverage the Foreign Tax Credit: Coordinate timing of foreign and US tax payments to maximize credits

5. Consider 1031 Exchanges: For investment properties, defer gains by reinvesting in similar foreign property (foreign-to-foreign only)

For comprehensive strategies, see our article on How to Avoid Capital Gains Tax on Foreign Property.

What If I’m Behind on Reporting?

If you haven’t reported rental income or a property sale, you have options:

Streamlined Filing Procedures

For late filers who owe minimal tax, the IRS offers streamlined procedures with reduced or no penalties. Designed specifically for expats who weren’t willfully avoiding taxes.

Delinquent FBAR Submission

Catch up on missed FBAR filings when you have reasonable cause.

Most expats qualify for penalty relief when they proactively come forward. For guidance, see our articles on Streamlined Filing and Delinquent FBAR Submission.

Common Mistakes to Avoid

Not Tracking Currency Exchange Rates: Keep documentation of rates at purchase, improvements, and sales
Forgetting FBAR Requirements: If foreign accounts exceeded $10,000 at any point, filing is required.
Misunderstanding Section 121 Timeline: You need 24 months of ownership AND use within 5 years before sale
Not Keeping Improvement Records: Improvements increase the basis and reduce the taxable gain.
Ignoring Depreciation Recapture: Claimed depreciation on rental property must be recaptured at sale (taxed at 25% rate)

Country-Specific Considerations

Canada

Canada doesn’t tax principal residence sales for residents, but the US does. Canada taxes only 50% of capital gains, which may not provide a sufficient foreign tax credit to offset US taxes fully.

United Kingdom

The United Kingdom‘s Complex domicile rules and principal private residence relief require careful coordination between both tax systems.

Australia

Australia‘s principal residence exemption has no dollar limit, unlike the US $250,000/$500,000 cap. Significant gains may escape Australian tax but still be subject to US taxation.

Mexico

Mexico withholds 25% of the gross sales price for non-residents. You’ll need to file a Mexican return to claim a refund of excess withholding.

Get Expert Help with Foreign Property Reporting

Greenback is an American company founded in 2009 by US expats for expats. Many of our CPAs and Enrolled Agents are expats themselves who live in 14 time zones.

No matter how late, messy, or complex your return may be, we can help. You’ll have peace of mind, knowing that your taxes were done right.

If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.

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Disclaimer: This article is for informational purposes only and should not be considered tax advice. Please consult with a qualified tax professional regarding your specific situation.

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