How Does the Exit Tax Apply to Foreign Real Estate Owned by a Covered Expatriate?

The exit tax under Section 877A treats all worldwide assets, including foreign real estate, as sold at fair market value on the day before your expatriation date. Any gain above your cost basis is included in the net gain calculation, offset by the exclusion amount ($890,000 for 2025), and taxed at applicable capital gains rates (IRS: Expatriation Tax).

How foreign property is valued:

Key considerations for foreign real estate:

• Currency gain is embedded: if you bought a London flat for 400,000 GBP when the rate was 1.25 (basis = $500,000) and it is now worth 600,000 GBP at a rate of 1.30 (FMV = $780,000), your deemed gain is $280,000, reflecting both property appreciation and currency movement
• No Section 121 exclusion: the primary residence exclusion ($250,000/$500,000) does not apply to the exit tax deemed sale, even if the property was your main home
• Depreciation recapture: if you claimed depreciation on foreign rental property, the recapture portion is taxed as ordinary income (up to 25%)
• The exit tax exclusion applies: the $890,000 (2025) aggregate exclusion covers all mark-to-market gains, including real estate

Deferral option for illiquid property:

• You can elect to defer the exit tax on real estate by posting adequate security (bond or letter of credit) with the IRS
• Interest accrues from the original due date until you actually sell the property and pay the tax
• This is useful when the property cannot easily be sold to fund the tax liability

If you actually sell the foreign property after expatriation, any additional gain above the deemed sale FMV is taxed under the regular nonresident rules (FIRPTA does not apply to foreign property; foreign property gains are generally not U.S.-source income for former citizens).

For more, see our Exit Taxes guide.