Is the sale of a U.S. taxpayer’s foreign home eligible for the principal residence profit tax exclusion?
A U.S. taxpayer’s ability to qualify for the principal residence tax exclusion doesnot require the principal residence to be in the United States. A U.S. taxpayer’s global income, including capital gains from the sale of a primary residence, is subject to taxation, and thus eligible for tax exclusions. [Internal Revenue Code§121]
The principal residence tax exclusion allows a taxpayer selling their principal residence to exclude up to $250,000 of the profit on the sale ($500,000 for married couples filing jointly). Gains in excess of these thresholds will be taxed under capital gains tax rates.[26 Code of Federal Regulations §1.121-1]
To qualify for the exclusion, the U.S. taxpayer must own and have used the property as their principal residence for at least a cumulative two of the five years preceding the sale. If the taxpayers are a married couple filing jointly, at least one spouse must satisfy the ownership rule. Both must satisfy the use rule.
Additionally, the country in which the principal residence is located might tax the U.S taxpayer’s profit on the sale of the property. If the seller’s profit on the sale exceeds the §121 threshold, any foreign tax paid can be claimed as a tax credit in the United States. However, the tax credit can only be claimed for taxes paid on profits exceeding the $250,000/$500,000 threshold. [IRC § 901(a)]
Keep in mind that any cost bases, purchase prices, sales proceeds and other amounts must be converted to U.S. dollars before determining tax exclusions. Additionally, gains of $200 or more from favorable exchange rates must be reported as income. [Internal Revenue Service Publication 525]
For more on the principal residence profit tax exclusion, see the Tax Benefits of Ownership volume of the first tuesday Realtipedia, or consult with a qualified tax professional.