What are the tax implications of selling foreign property?

Selling foreign real estate triggers US tax reporting obligations and potentially significant tax liability. The gain or loss must be reported on your US tax return, and several complex rules apply that differ from domestic property sales.

The capital gain is calculated in US dollars, which introduces exchange rate risk. You determine your cost basis by converting the original purchase price to USD at the exchange rate on the purchase date, and you convert the sale proceeds at the exchange rate on the sale date. If the foreign currency depreciated against the dollar between purchase and sale, you may have a larger USD gain than your gain in local currency. Conversely, if the dollar weakened, your USD gain may be smaller.

The Section 121 primary residence exclusion ($250,000 single/$500,000 married) may apply to foreign property if it was your primary residence and you meet the ownership and use tests (owned and lived in the property for 2 of the last 5 years). However, this exclusion is more difficult to claim for expats who may have multiple residences, and any gain attributable to depreciation (if previously rented) is not eligible for the exclusion.

If the property was a rental or investment property, you must recapture all depreciation previously claimed. Depreciation recapture is taxed at a maximum rate of 25%, while the remaining capital gain is taxed at long-term capital gains rates (0%, 15%, or 20% depending on your income level).

Foreign taxes paid on the sale (such as capital gains tax or transfer tax in the foreign country) may be creditable as a Foreign Tax Credit on Form 1116. This can significantly offset US tax liability. Some countries impose substantial capital gains taxes on real estate sales — for example, France imposes up to 36.2% on non-resident property sales.

Additional considerations include reporting the sale on Form 8949 and Schedule D, potential Net Investment Income Tax (3.8%) if your income exceeds thresholds, and state tax implications if you maintain a US state residency.