Capital gains tax on foreign property: How to report and exclusions you can use (2025)

US tax rules follow you no matter where you live. When you sell a home or land in another country, the IRS still wants you to report the profit. In simple words, you figure out how much money you made, change the numbers into US dollars, and then see what tax breaks you can use.

Yes, US citizens and residents must report and may need to pay capital gains tax when selling foreign property. But you might cut your tax bill with these rules:

• Primary residence exclusion – You can keep up to $250,000 of gain tax-free (or $500,000 for many married couples filing jointly) when the place was your main home, following Section 121.
• Foreign tax credit – If the other country taxed your profit, US rules let you use that tax to lower what you owe here by filing Form 1116.
• Long-term rates – If you owned the property for over 1 year, your gain may be taxed at 0–20%, instead of higher regular income tax rates that go up to 37%.

This means you report the sale, use the home exclusion if it fits your case, and use the foreign tax credit to avoid paying tax twice. You do this on forms like Form 8949, Schedule D, and Form 1116 so the IRS can see the numbers clearly.

This article is brought to you by Taxes for Expats (TFX), a top-rated tax firm that helps US citizens, residents, and anyone with US tax duties around the world. If you need support with capital gains tax on foreign property, contact us today.

How capital gains will be reported on your tax return

When you sell foreign property at a profit, the IRS treats the gain as taxable income. This rule comes from the IRS worldwide income guidance and Publication 54.

How to calculate your capital gain

Your gain is the money you make after the sale minus what you invested in the property. The IRS calls what you invested your adjusted basis. This term is described in IRS Publication 551 and Publication 544.

Your adjusted basis includes:

• Original purchase price, including cash you paid and any mortgage you took on
• Closing costs you had when you bought the home (some legal fees, recording fees)
• Improvement costs, such as a new roof, an addition, or major upgrades
• Taxes and legal fees you had to pay when you bought the property

If the home was a rental, the depreciation you took earlier lowers your adjusted basis. This matters for rental property capital gains and for some section 1250 property, because part of the gain can be taxed at special rates under IRC section 1250.

If you have inherited foreign property, the IRS often uses the property’s value on the date of death as the starting basis (under section 1014, explained in Publication 551).

Simple calculation breakdown:

• Sale price: $400,000
• Original purchase: $250,000
• Closing costs added to basis: $5,000
• Improvements: $30,000

Your adjusted basis is $250,000 + $5,000 + $30,000 = $285,000.
Your capital gain is $400,000 − $285,000 = $115,000.

This follows the IRS rules explained in Topic 409 and Publication 544.

When to use exchange rates

If your sale and purchase were in foreign currency, the IRS wants all amounts shown in US dollars. This process is explained in the IRS foreign currency guidance.

Use exchange rates on these specific dates:

1. Purchase date rate – to convert the amounts that make up your adjusted basis
2. Improvement date rates – to convert each major renovation or upgrade you add to the basis
3. Sale date rate – to convert your sale proceeds and selling costs

Good sources for legal exchange rates include: US Treasury Department rates, Federal Reserve rates, or any other public exchange rate source used in a consistent way.

Keep copies of the rates you used. The IRS can ask for proof during an audit.

Short-term vs long-term capital gains

The IRS taxes capital gains differently based on how long you owned the property before the sale. Short-term gains (held one year or less) are taxed at your regular income tax rates, which range from 10% up to 37% for 2025. Long-term gains (held more than one year) generally get lower 0%, 15%, or 20% rates.

This timing rule affects selling foreign property, vacation home capital gains, and land sales. If the home was rented, part of the gain may be taxed at up to 25% as unrecaptured section 1250 gain, which follows the rules for section 1250 property.

Required forms and filing

The IRS wants each foreign sale reported clearly. These forms are official and required for capital gains tax on foreign property.

• Form 8949 – Sales and Other Dispositions of Capital Assets
  List the sale with dates, adjusted basis, and gain. This is where the math goes.
• Schedule D (Form 1040) – Capital Gains and Losses
  Add all gains together here. It uses the numbers from Form 8949.
• Form 1116 – Foreign Tax Credit
  Use this form when the foreign country also taxes the same gain. It prevents double taxation under Internal Revenue Code section 901. This is common when selling foreign property.
• FinCEN Form 114 – FBAR
  You file this if your foreign bank accounts were over $10,000 at any time during the year. Sale proceeds often make this happen.
• Form 8938 – FATCA Statement of Specified Foreign Financial Assets
  Filing can start at more than $50,000 at year-end for single filers (limits are higher if married or living abroad). The sale may push you over the threshold.

If the home qualifies as a main home, the primary residence exclusion under section 121 may let you exclude up to $250,000 of gain ($500,000 for some married couples).

Need a checklist for every form after a foreign property sale? Walk through all required forms here

Learn more

How to avoid capital gains tax

While income is taxable by default, there are still thresholds to cross and benefits to claim before you rush out to file the paperwork. You should keep in mind that when handling foreign capital gains from selling property, the capital gains tax on foreign property still follows US rules even when the home sits overseas.

Good planning can lower taxes when selling foreign property, and the IRS rules below make it possible to do that in safe and simple ways.

Exclude gains on your principal residence

To understand how the primary residence exclusion in §121 works, think of it as a rule that lets you remove a large part of your gain when you sell your main home, even if the home sits in another country, as long as you meet a few clear tests written in IRS rules and explained in Publication 523 and Topic 701.

And when life takes a turn, IRS rules still help, because military members, Foreign Service workers, and intelligence community members may “pause” the 5-year clock for up to 10 years, and a sale caused by work changes, health issues, or other unexpected events may allow a partial exclusion, which Publication 523 explains with worksheets.

• ❌ If you lived in the home only 18 months (Jan 2020 – Jun 2021) and sold in Dec 2024, you do not meet the 24-month test.
• ✅ If you lived there for 26 months total across two periods (Jan 2020 – Jun 2021 and Jan 2023 – Aug 2023), you do meet the test and can use §121.

A vacation home capital gains case usually fails the rule because a vacation home does not count as a main home. A rental property capital gains case also does not qualify unless it was your actual main home, and any past depreciation leads to depreciation recapture taxed at up to 25 percent under unrecaptured §1250 gain, plus a possible 3.8 percent NIIT on top, which the IRS explains in Publication 544 and the NIIT instructions.

If the home was inherited foreign property, the IRS generally gives a “stepped-up basis” using fair market value on the date of death (Publication 551), which can lower the gain reported on Schedule D and Form 8949.

Leverage Foreign Tax Credit

To follow how the foreign tax credit under §§901 and 904 works, picture it as the IRS rule that keeps you from paying tax twice when another country already taxed the same gain, and you use Form 1116 to get a dollar-for-dollar credit by:

Step 1 – You first pay the tax the foreign country charges on the gain from the property you sold.

Step 2 – You then figure out how much US tax applies to that same gain, using US capital gains rules and converting all numbers into US dollars.

Step 3 – You claim a dollar-for-dollar credit on Form 1116 for the foreign tax you paid, but never more than the limit set by §904.

Step 4 – You only pay the IRS the leftover amount if the US tax is higher, and you may carry back unused foreign tax for 1 year or carry it forward for 10 years.

It helps to remember that the credit cannot be bigger than the US tax on that same income, that the IRS separates foreign income into “baskets” you must track, and that some income is passive while other income is general, which changes how Form 1116 works.

This example shows how simple the numbers look in practice:

• Gain from selling foreign property: $100,000
• US long-term capital gains tax: 20%, or $20,000
• Foreign tax paid: $18,000

You claim the $18,000 credit.
Your US tax is $20,000.
You pay the IRS only $2,000.

This rule works very well when the home is a second home, such as a vacation home capital gains case, because you cannot use §121 there, but you can use the foreign tax credit. Treaties sometimes help, too, but IRS rules say you must still check the treaty article on gains and then follow Form 1116 rules to see what actually applies.

Use a like-kind exchange (1031 exchange)

Since December 31, 2017, §1031 no longer works for foreign real estate. The IRS now says only US real property can be exchanged, and foreign real property is not like-kind to US property.

Here is what the rule now looks like:

• §1031 applies only to US real property held for investment or business – not personal-use homes.
• Foreign-to-foreign, foreign-to-US, and US-to-foreign exchanges do not qualify.
• IRS confirms in Publication 544 and Form 8824 that foreign property and US property are not like-kind.
• If someone did a valid 1031 exchange before 2018, the old deferred gain still stays in the basis and becomes taxable when the new property is sold.
• A real 1031 exchange still allowed inside the US must use a qualified intermediary, identify the new property in 45 days, and finish the exchange in 180 days.
• When 1031 cannot be used for foreign property, people often rely on the foreign tax credit, selling in a low-income year, an installment sale under Publication 537, a Qualified Opportunity Fund under §1400Z-2, or careful planning around depreciation recapture and unrecaptured §1250 gain shown in Publication 527 and Publication 544.
• A well-timed capital loss can also reduce the gain before any tax rate applies.

In short, the 1031 exchange foreign property path is closed, the rules now favor only US-based investment swaps, and foreign real estate owners must use other IRS-approved tools instead. These tools still reduce tax but work in simpler ways than the old foreign 1031 rules. And with the limits now set in law, planning early makes each option easier to use.

2024–2025 long-term federal capital gains rates

These IRS numbers come from official yearly inflation updates and apply after all gains and losses are netted.

To tie everything together, remember that the Net Investment Income Tax adds 3.8 percent once MAGI goes over $200,000 (single or head of household), $250,000 (married filing jointly), or $125,000 (married filing separately), based on §1411. State taxes may also apply, as many states treat gains like ordinary income.

An expat with $100,000 of short-term gain in the 24 percent bracket pays $24,000, while long-term gain in the 15 percent bracket costs only $15,000, saving $9,000. And when a person has a capital loss from another investment, it can lower the gain before any US tax bracket applies.

Take advantage of tax treaties

A tax treaty is a legal deal between the United States and another country. It tells both sides how to tax income, including capital gains from property. Courts treat these deals as real law.

In Smith v. Commissioner, the Tax Court showed how the United States and Australia used their treaty, the foreign earned income rules, and the foreign tax credit to stop double taxation for people working at the Pine Gap site.

Popular expat places with US tax treaties that talk about capital gains have rules that help people avoid being taxed twice.

• United Kingdom – The US–UK income tax convention lets the UK tax gains from UK property first (Article 6 and Article 13). The United States then gives you a foreign tax credit, and still applies Section 121 if you lived in the home. Both countries’ rules working together often lower the final tax.
• Canada – The US–Canada income tax convention (Article XIII) gives Canada first rights to tax gains on Canadian real estate. The United States then gives a foreign tax credit for Canadian income tax. For many owners, Canadian tax plus the US credit stops extra US tax.
• Australia – The US–Australia treaty treats Australian capital gains tax as a real income tax counted for the foreign tax credit. When a property is sold in Australia, the tax paid there normally reduces the US bill.
• Germany – The US–Germany treaty says Germany can tax German real estate gains first (Article 13). If Germany taxes the gain, the United States lets you use the foreign tax credit, so the same gain is not taxed twice.
• France – The US–France treaty allows France to tax French real property first. The United States still taxes its citizens, but it must give a foreign tax credit for French income tax. Any benefit comes from the French rules plus the US credit.
• Japan – The US–Japan treaty uses residency rules and then lets each country give foreign tax credit relief. A US person selling Japanese property uses both Japanese tax rules and the US credit to keep the tax fair.

It is not enough to just know the countries that have treaties with the US if you don’t know how to apply those benefits to your capital gains tax. We have broken down the steps of the application to reduce your capital gains on foreign property.

1. See if a treaty exists. IRS Publication 901 and the online treaty list show if the United States has a treaty with the country.
2. Read the gains article. Most treaties use Article 13 to explain who taxes property gains.
3. Use Form 8833 if needed. You file Form 8833 when your treaty position is different from the normal US rules under section 6114.
4. Apply the treaty on your US return. Report the gain, the foreign tax, and use Form 1116 if foreign tax credit rules apply.
5. Keep proof of foreign tax. Save tax bills and closing papers so you can show how much tax you paid.

Most states do not follow treaties. This means state capital gains tax may still apply even when the treaty helps at the federal level. When a person who lives in the UK sells a UK main home, the UK can tax the gain first under the treaty. The United States then gives a foreign tax credit for UK tax and may allow the Section 121 exclusion. These rules together often lower the US tax on the sale.

The capital gains tax on foreign property is still based on US law. The treaty mainly sets the order of who taxes first and how the foreign tax credit is used.

Rely on a trust or other legal entity

Sometimes, US expats hold foreign property through a trust, a company, or another legal setup. This can change how the IRS looks at ownership, but it does not remove US tax duties. Here is the simplest way to understand each structure and how it may affect a property sale.

• Foreign trusts. A foreign trust can give strong asset protection and can help with estate planning in the country where the property sits, but the IRS treats foreign trusts as high-risk structures. This means the owner deals with Forms 3520 and 3520-A, and there can be a Throwback tax on income that was kept inside a foreign non-grantor trust.
• Foreign corporations. A foreign corporation may provide liability protection or help meet local rules overseas, yet the same structure can trigger PFIC issues, controlled-foreign-corporation rules, possible double taxation, and heavy annual reporting on Form 5471 and sometimes Form 8621.
• US LLC holding foreign property. A US single-member LLC gives simple pass-through taxation and basic liability protection, but it does not create tax deferral and can still cause foreign reporting or local business-presence questions.
• Opportunity Zone Funds (US property only). A qualified opportunity fund can give federal tax deferral on certain gains until 31 December 2026, and later growth may be partly or fully tax-free if the holding rules are met, but these benefits apply only to US property and cannot be used for foreign real estate.

Because these setups do not remove US tax, the IRS still needs to know who owns or controls the entity. This is why there are reporting requirements if using entities, and these forms connect directly to the structures listed above:

1. Form 5471 is used when a US person owns or controls a foreign corporation.
2. Form 8865 is used when a US person has an interest in a foreign partnership.
3. Form 3520 is used to report transfers to a foreign trust or certain large foreign gifts.
4. Form 8938 is used to report foreign financial assets, including interests in foreign entities.
5. FinCEN Form 114 (FBAR) is used when foreign accounts go over $10,000 at any time during the year.

NOTE! These structures do not remove US tax obligations and often create more forms and higher costs.

When entity structures make sense:

✅ High-net-worth owners with many properties

✅ Commercial real estate investments

✅ Long-term international business operations

✅ Estate plans that must work for heirs in different countries

When they do not make sense:

❌ One personal home abroad

❌ Small investment properties

❌ Short-term property holdings

Other tax reduction strategies

Here are simple legal ways to reduce capital gains tax using tools the IRS already allows.

• Installment sales. With an installment sale, you get at least one payment after the year of sale, report part of the gain as each payment comes in, and use Form 6252 to show this to the IRS.
• Offset with capital losses. You can offset property gains with capital losses from other investments, use up to $3,000 of net losses each year to cut ordinary income, carry extra losses forward without limit, and try to match short-term losses with short-term gains.
• Sell in a low-income year. Selling in a low-income year, such as before pensions or Social Security start, in a year when the foreign earned income exclusion lowers income, or in a year with business losses or big deductions, is simple tax planning that can keep your gain in a lower tax bracket.
• Donate appreciated US property. For US property only, donating appreciated real estate you have held for more than one year to a qualified charity lets you avoid capital gains tax on the increase and may give you a deduction for fair market value.
• Gift to family members. Gifting property to family members in lower brackets means they pay the capital gains when they sell, but gift tax rules, such as the $18,000 annual exclusion per person in 2024, apply, and your cost basis usually carries over to them.

Special situations and property types

Different property types and ownership situations have unique tax implications. Understanding these rules helps you avoid unexpected tax bills and maximize available exclusions.

What is Section 1250 property?

Section 1250 property is depreciable real property used in a business or held for investment, such as rental homes, apartment buildings, and commercial property. If someone asks what is section 1250, it simply means real estate that has been depreciated for tax purposes.

When you sell this type of property, tax can apply to two parts:

1. Regular capital gains on appreciation
2. Depreciation recapture on the depreciation you were allowed to take

How depreciation recapture works

For foreign rental property, depreciation recapture is taxed as unrecaptured Section 1250 gain, which has a maximum tax rate of 25%. This rule applies even when the rest of the gain qualifies for long-term capital gains tax treatment. The IRS also makes you recapture depreciation even if you never claimed it, as long as you were allowed to claim it. A typical example is:

• Purchased foreign rental property: $300,000
• Depreciation claimed over 10 years: $50,000
• Adjusted basis: $250,000
• Sale price: $400,000
• Appreciation gain: $400,000 − $300,000 = $100,000
• Depreciation recapture: $50,000 taxed at up to 25%
• Remaining gain: $100,000 taxed at long-term capital gains rates

NOTE! These sales usually require several IRS forms, including Form 4797 for the sale of business property, Form 8949 and Schedule D for capital gains reporting, plus a detailed depreciation schedule showing yearly depreciation amounts.

Selling inherited foreign property

When you inherit foreign property, the IRS uses a step-up in basis. Your basis becomes the fair market value on the date the owner died, so you only pay tax on the value that grew after you received the home. This makes the gain smaller and easier to report.

For example, if the owner bought the home for $200,000 and it was worth $350,000 at death, your new basis is $350,000. If you sell for $400,000, your taxable gain is only $50,000. The step-up rule keeps you from being taxed on old gains.

A foreign inheritance over $100,000 may need Form 3520, and the later sale goes on Form 8949, and Schedule D. A date-of-death appraisal and estate papers help prove the basis. These records make IRS reporting simple.

Concerned about both inheritance reporting and capital gains on foreign property? Read this

Read more

Vacation homes and second properties

Vacation homes and second homes often do not qualify for the main home exclusion because you do not live there as your main home for 24 of the last 60 months.

1. A home used only for vacations is treated as personal-use property, so full capital gains tax applies to the growth in value, and the $250,000 / $500,000 exclusion is not available. Losses on personal-use property cannot be deducted.
2. A partial exclusion may work if you turn the vacation home into your main home and live there for 24 of the last 60 months. If you do this, the IRS may still reduce your exclusion because of “non-qualified use,” which is the time the home was not your main home.
3. The IRS uses a simple formula: qualified use ÷ total ownership × exclusion amount. For example, if you owned the home from 2015–2020 as a vacation home (5 years), then lived in it as your main home from 2020–2024 (4 years), your non-qualified use is 5 of 9 years, or 55.5%, so the allowed exclusion is 44.5% of $250,000, which is $111,250.

NOTE! Renting a vacation home adds more rules.

• ✅ Can deduct expenses and depreciation
• ❌ Must recapture depreciation when selling
• ✅ May qualify for a 1031 exchange (US property only)
• ❌ Rules are complex if personal use is more than 14 days a year

Rental property and investment real estate

Rental and investment properties have their own tax steps while you own them, and again when you sell them.

While owned

Rental income must be reported each year on Schedule E, and you can deduct costs like maintenance, management, and insurance. You can also claim depreciation, and foreign rental income may be taxed overseas, which may allow a foreign tax credit.

When selling

Selling a rental property has its own rules. You pay capital gains tax on appreciation based on your adjusted basis, and you must recapture depreciation at up to 25%. If a foreign country taxes the sale, you may be able to use the Foreign Tax Credit to reduce US tax on that gain. The main home exclusion does not apply to rental or investment property.

Documentation needed

Good records make every step easier. You should keep all rental income records, expense receipts, depreciation schedules, foreign tax returns, and the exchange rates used for each major transaction.

Selling foreign property soon? Download a simple checklist for documents you’ll need at tax time

Learn more

Special strategies: → Consider installment sale to spread tax over multiple years → Time sale in low-income year → Offset with capital losses from other investments → If ceasing rental activity, review passive activity loss rules

Conclusion

Selling foreign property becomes much easier when you focus on the core rules. Here are the simple points to keep in mind as you close out your sale.

• Key takeaways: Report the gain to the IRS, use the $250,000–$500,000 home exclusion if it fits, apply the Foreign Tax Credit to avoid double taxation, aim for the lower 0–20% long-term rate, and keep clean records with correct currency conversions.
• Your next steps: Gather your documents, calculate your gain, check your exclusions or credits, look at your timing for long-term status, and talk to an expat tax specialist.
• Common mistakes to avoid: Wrong exchange rates, missing foreign tax credit relief, losing improvement receipts, treating a vacation home as a main home, and forgetting FBAR or FATCA reporting.

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