How Is the Exit Tax Exclusion Amount Calculated for Covered Expatriates?
The exit tax under Section 877A treats a covered expatriate’s worldwide assets as sold at fair market value on the day before expatriation, but an exclusion shelters a portion of the net gain from tax. The exclusion amount is indexed annually for inflation: $866,000 for 2023 and 2024, $890,000 for 2025 and 2026 (IRS: Expatriation Tax).
How the exclusion works:
| Step | Calculation |
| 1. Deemed sale | All worldwide assets treated as sold at FMV on the day before expatriation |
| 2. Net gain | Total deemed gain minus total deemed loss across all assets |
| 3. Apply exclusion | Subtract the exclusion amount ($890,000 for 2026) from the net gain |
| 4. Tax the remainder | Remaining gain taxed at applicable capital gains or ordinary income rates |
Key rules about the exclusion:
- Aggregate, not per-asset: the exclusion applies to your total net gain across all mark-to-market assets, not to each asset individually
- Losses offset gains: if you have $1.2 million in gains on some assets and $400,000 in losses on others, your net gain is $800,000, which falls entirely within the exclusion
- Does not apply to specified deferred accounts: IRAs and 401(k)s are treated as immediate lump-sum distributions with no exclusion; the full balance is taxed as ordinary income
- Does not apply to nongrantor trust interests: these follow separate rules under Section 877A(f)
- Indexed annually: the IRS publishes the updated amount in a revenue procedure each year
Example calculation (2026 expatriation):
| Asset | FMV | Basis | Gain/Loss |
| U.S. stock portfolio | $2,000,000 | $800,000 | +$1,200,000 |
| Foreign real estate | $500,000 | $600,000 | -$100,000 |
| Personal residence | $400,000 | $300,000 | +$100,000 |
| Net gain | $1,200,000 | ||
| Less exclusion | -$890,000 | ||
| Taxable exit gain | $310,000 |
The $310,000 would be taxed at the applicable capital gains rate (generally 20% plus 3.8% NIIT for high-income expatriates). Your personal residence does not qualify for the Section 121 exclusion under the exit tax rules.
For more, see our Exit Taxes guide.
Last updated on April 29, 2026
