Capital Gains Tax for US Expats – What You Need to Know
All Americans are required to file US taxes every year reporting their worldwide income, whether they live in the US or abroad.
Thankfully, there are several exemptions, such as the Foreign Earned Income Exclusion, that expats can claim when they file that allow them reduce or entirely eliminate entirely their US tax liability.
What about expats who sell property or other capital assets though for a financial gain?
In this article we look at the capital gains tax implications for US expats.
What is Capital Gains Tax?
A capital gain is the financial gain realized when someone sells a property, asset (including art and jewelry, etc), or investment that has increased in value.
In most cases, the US taxes capital gains at either 15% or 20%.
Expats should note that US capital gains tax applies to capital gains on worldwide assets and investments, irrespective of whether the sale is subject to foreign capital gains tax too or not (though if so this can normally be offset – keep reading for details).
How to calculate capital gains tax
A capital gain can be calculated by subtracting an asset or investment’s purchase price from the sale price.
US capital gains is only applicable to assets owned for more than one year, which are known as long term gains. Gains made on assets owned for less than a year are considered to be short term gains and considered income.
In the case of foreign property however, expats can also add the following costs to the purchase price before calculating the US capital gains tax liability:
“If Americans living in Canada sell a house for a gain of more than $250,000 (U.S.) per taxpayer, they must pay capital gains tax on it.”
– the Globe and Mail
- Costs of improvements that have a useful life of more than 1 year (new roof, additional bedrooms, fences, etc.)
- City or county assessments for local public improvements
- General sales tax imposed on the purchase
- Settlement charges from the purchase or sale including fees, title fees, attorney fees, and commissions
- Commissions and fees relating to the sale/purchase of stocks and bonds
The US has a $250,000 capital gains exemption on the sale of a primary residence if you lived in it for at least 2 of the previous 5 years before selling, so only capital gains over this amount are liable to be taxed. This threshold also doubles to $500,000 if the taxpayer files jointly with their spouse.
How to report capital gains
Expats should report their capital gains in their annual US tax return on Form 1040 Schedule D.
Capital losses incurred during the year can be offset against capital gains. Up to $3,000 in losses beyond those that offset the capital gains can be used to offset ordinary income. If there is excess loss in a given year, it can be carried forward indefinitely.
Many expats wonder whether the IRS will know if they sell foreign property or assets. The IRS normally finds out either from the expat’s FBAR report for that year, or because the expat’s host country provides the expat’s foreign tax information under an information sharing agreement.
What if expats also owe capital gains tax to another country?
Expats who pay capital gains tax in another country can normally claim the IRS Foreign Tax Credit when they file their US tax return, which allows them to claim a $1 US tax credit for every dollar of tax they’ve paid in another country. This way, while expats must still report their capital gain to the IRS, they won’t end up paying capital gains tax twice on the same gains, and furthermore if the foreign rate is higher they will be left with excess US tax credits that they can carry forward for future use.
Expats who are behind with their US tax filing can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure.
To catch up using the Streamlined Procedure, expats must file their last 3 tax returns and last 6 FBARs (as appropriate), pay any back taxes due (often none, once expats claim the most relevant exemptions for their circumstances), and self-certify that their previous failure to file was non-willful.