US Expat Taxes: Buying and Selling Real Estate Abroad

Foreign real estate and property ownership for expats

Moving abroad is a stressful process, even more so when you throw in foreign property purchases that can impact your US expat taxes. So many issues surround the ownership of foreign property, including market conditions, foreign mortgages, exchange rates, new cultures, and even different legal structures. As you may already know, a US citizen’s worldwide transactions are reporting requirements on their US expat taxes, including transactions associated with the ownership of foreign property. So, below, we’ll discuss how the purchase or sale of overseas property will affect your US expat taxes.

Do Expats Have to Pay US Tax on Foreign Property?

Americans living abroad are required to report and pay US tax on any gains from foreign property sales. Expats are also required to report any rental income earned from foreign property. Essentially, the same US tax rules apply regardless of whether the property is located in the US or a foreign country.

Buying Property Overseas: How It Affects Your US Expat Taxes

Generally speaking, the purchase of property–foreign or domestic–does not need to be reported on your US expat taxes (unless there is a Homebuyer’s Credit in place for the related year).

When a property is sold, however, the resulting gain or loss will need to be reported on Schedule D of the taxpayer’s US expat taxes. For this reason, it’s crucial to keep documentation of the original purchase and all costs associated with the property.

Buying Foreign Real Estate

Real estate transactions in foreign countries are handled differently than US transactions. So, it’s crucial to research the applicable laws and insurance requirements for your new host country.

You will also find it beneficial to obtain a bank account in your host country to assist in the payment and management of your foreign mortgage, and other expenses such as property taxes. Your ownership interest in this foreign bank account could prompt the filing requirement of Form FinCEN 114, Report of Foreign Bank and Financial Accounts (FBAR).

When you transfer money into your foreign bank account, be aware of the foreign exchange rates and fees associated with the transfer. When making the initial down payment on your foreign property, you could be transferring significant sums of money. Good research and enlisting the help of a professional broker could save you thousands of dollars by ensuring that you are obtaining the most beneficial foreign exchange rate possible.

Host Country Requirements

Consult with the US embassy in your host country for any assistance regarding local laws, property taxes, and other requirements before purchasing your new property. Costs charged by government agencies, real estate agents, or legal advisors may be significantly more than in a US real estate transaction. These expenses vary from country to country. Researching and planning ahead can save you money on your US expat taxes.

In many countries, buying your property in a holding corporation rather than in your own name is customary. If the host country has different options for the type of holding corporation you can use, please contact a US tax advisor before making the decision. Some types of overseas entities will make it much harder to qualify for the gain exclusion.

Mortgage interest and points will continue to be deductible on your US expat taxes, despite the property’s location in a foreign country. However, this information needs to be reported in US dollars, so it’s important to convert the amounts before claiming the deduction. For assistance in the preparation of your US tax return, the IRS provides annual foreign exchange conversion rates for numerous countries and links to a reputable third-party website with more detailed historical information.

Selling Overseas Property: How Your US Expat Taxes Are Affected

The sale of your foreign property will have the most significant impact on your US expat taxes. As a US citizen, the sale of your principal residence will prompt a gain or loss that is reportable on your tax return.

However, if you have owned and lived in this home for at least two of the last five years, then you will be eligible to exclude a gain of up to $250,000 ($500,000 for married taxpayers) from taxation. If you have not owned and lived in the home for at least two out of the last five years, the gain will be taxed at capital gain rates.

Remember: even if the gain does not qualify or is not wholly excluded, it will be considered foreign source income, and thus eligible for the reduction by the foreign tax credit. However, it will not be regarded as foreign earned income, and therefore not excludable under the Foreign Earned Income Exclusion.

To calculate the gain, each transaction will need to be converted to USD on the transaction date rather than the sale date. All income must be reported in US dollars on US expat taxes.

Effects of the Exchange Rate on Foreign Property Sales

The other important transaction likely to result from the sale of a foreign residence is the gain or loss resulting from the foreign exchange rate conversion when the mortgage is paid off. The currency exchange gain or loss resulting from the payoff of the mortgage is considered personal. Thus, any resulting loss is not deductible. However, any resulting gain is taxable at ordinary income rates. If you have held the property for at least a year, you will qualify for the lower long-term capital gain tax rates. Unfortunately, you cannot use the loss on the sale of the home to offset any currency exchange rate gain and vice versa.

Selling Real Estate Abroad: Calculating US Capital Gains Tax

To help explain how to calculate the capital gains tax associated with selling your foreign real estate, let’s discuss the sale of John Expat’s primary residence outside the US.

John moved to China in 2005, where he immediately began searching for a home to purchase. He found one, and on November 17, 2005, he signed the papers to purchase his new home.

He paid 1,865,000 Chinese Yuan (CNY) for the property on the date of sale. On May 25, 2007, he paid 50,000 CNY for new windows on the house.

In 2011, he decided he wanted to move back to the US to spend time with his family and put his house on the market. He signed the closing papers on June 24, 2011, with a sales price of 2,010,000 CNY. At that time, he had 1,725,000 CNY left to pay on his mortgage.

Each transaction is converted to USD at the date the transaction occurred:

Transaction CNY Date Exchange Rate USD
Original Purchase Price 1,865,000 11/17/2005 0.1237 230,701
Improvements 50,000 5/25/2007 0.1305 6,525
Basis 1,915,000 237,226
Sales Price 2,010,000 6/24/2011 0.1543 310,143
Gain on Sale of Property 95,000 72,918

Because John owned and lived in the property for at least two of the last five years, he is eligible to exclude the entire gain associated with the sale of his principal residence.

The other transaction that results from the sale of his principal residence is the gain or loss resulting from the currency exchange. This is calculated as follows:

1. Mortgage Purchase Calculation

Remaining Mortgage (CNY) 1,725,000
Purchase Date Exchange Rate 0.1237
Mortgage Purchase (USD) 212,383

2. Mortgage Payoff Calculation

Remaining Mortgage (CNY) 1,725,000
Sale Date Exchange Rate 0.1543
Mortgage Payoff (USD) 266,168

3. Gain/Loss Calculation

Mortgage Purchase 213,383
Mortgage Payoff 266,168
Gain/(Loss) on Payoff (USD) (52,785)

It will take more USD to pay off the foreign mortgage than originally anticipated at the date of purchase. The result is a net loss of $52,785. Unfortunately, this loss is not deductible on John’s US expat taxes.

The total impact on John’s US expat taxes resulting from the sale of his Chinese principal residence is zero. He can exclude all of the gain associated with the sale of the property, and he incurred a loss on the currency exchange associated with the mortgage payoff which cannot be applied to his other foreign income.

Questions About How Your US Expat Taxes Will Be Affected by Foreign Property Transactions?

If you are going to be buying a residence overseas, you should discuss your options with your host country’s US embassy, consult multiple international real estate brokers, and discuss your options with an expat tax expert. Doing so will allow you to know what to expect from your purchase of a home overseas and avoid any unpleasant surprises on your US tax return.

Book a consultation with Greenback, and we’ll help you make the best decisions for your US expat taxes.