Generally, the U.S. taxes its citizens worldwide. As a U.S. citizen living abroad, you must report the sale of your UK home to the IRS. Collaborating with your real estate agent is essential to accurately report the sale of your overseas property during tax season. While the process generally follows the same guidelines as reporting a home sale in the U.S., there are unique considerations since the property is outside the U.S.
U.S. Tax Implications
- Primary Residence Exclusion
Under Internal Revenue Code Section 121, if you have lived in and owned your UK home for two out of the past five years, you may exclude up to $250,000 of capital gains ($500,000 if married and filing jointly). - Standard Capital Gains Tax
If the property was not your primary residence, standard capital gains tax rates apply, typically between 0% and 20%, plus an additional 3.8% Net Investment Tax.
Foreign Mortgage Gain
- Mortgage in Foreign Currency
If your UK home mortgage is not denominated in USD, redeeming, re-mortgaging, or repaying capital upon sale can trigger gains. This falls under IRS Code Section 988, which calculates foreign exchange gain or loss on personal debt transactions. - Foreign Exchange Gain
If you repay the mortgage with fewer dollars due to a weak pound, a foreign exchange gain and U.S. tax liabilities may arise. However, currency losses are considered personal losses and are not recognized.
UK Tax Implications
- Primary Residence
If the home was your primary residence for the entire ownership period, there is no UK tax liability. - Rental or Vacant Property
- Residential Property Capital Gains Tax
If the property was rented out or left vacant, a capital gains tax of 24% applies if total gains and income exceed the income tax basic rate band. Below the basic rate band, the tax rate is 18%. - Non-Residential Property or Other Assets
Capital gains tax rates for individuals are 10% and 20%.
Foreign Tax – Double Taxation
- Foreign Tax Credit
If you paid capital gains tax in the UK, you could claim a foreign tax credit on your U.S. return. For rental properties, you may owe taxes in the UK on rental income, which allows you to claim a U.S. foreign tax credit for UK taxes paid, though up to a limit.
Reporting Sale of a Foreign Home
- Required Forms
- Form 1040, Schedule D – Capital Gains and Losses
- Form 8949 – Sales and Other Dispositions of Capital Assets
- Currency Conversion
Report capital gains in U.S. dollars, using the exchange rate at the purchase and sale dates of the property.