Selling Gifted Property VS Selling Inherited Property – an Expat Guide
03/14/2023
As an expat, deciding whether or not to sell your gifted or inherited property can be perplexing because there are many tax factors to consider. Of course, plenty of expats purchase homes abroad too, but for the purposes of this article, we’re taking a deep dive into the tax implications of selling gifted property vs selling inherited property as an expat.
Selling a house has different tax implications depending on your country of residence, and how you came to own the property. For this reason, understanding what type of property you’re selling is extremely important.
What is a gifted house for tax purposes
A gifted house is:
- a house transferred to you for nothing in return or a sum less than its fair value.
- inherited property is received by being passed down to a designated heir, inheritor, or successor after someone passes away.
To be extra clear:
- The tax information shared in this article applies whether you’re selling your US home or your foreign home.
Let’s jump right to the tax implications of selling a gifted property vs. selling an inherited property as an expat.
Expat tax implications of selling a gifted house
When you sell a house, you may need to complete Form 8949, Sales and Other Dispositions of Capital Assets, share the transaction details with the IRS and pay capital gains tax on the sale. Your obligation to complete Form 8949 depends on whether or not the home was used as a personal residence prior to the sale.
What determines the actual tax you owe is the amount of capital gains you make on the transaction and the value of the house when it was originally gifted to you.
Let’s start by looking at capital gains. Then we’ll move on to discuss the gift tax implications.
What is capital gains tax?
You create a capital gain when you sell an asset for more than your basis for it. Your basis will vary depending on how you acquired the property, and whether you’ve made any improvements to it.
And the IRS wants its share of that gain. That’s when the capital gains tax comes into play.
Calculating capital gains tax on gifted property
Depending on how long you held the asset you want to sell, you may pay either:
- Long-term capital gains tax
- Short-term capital gains tax
Short-term capital gains tax applies to the sale of assets held for less than a year. And the short-term capital gains tax rates are the same as your ordinary income tax rates. That can be anywhere from 10% to 37%.
Conversely, long-term capital gains tax applies to selling assets held for more than a year. Long-term capital gains tax can either be 0%, 15%, or 20%. The exact amount depends on:
- The amount of long-term capital gains you’ve earned
- Your filing status
- The year of sale (capital gains tax brackets are adjusted for inflation annually
Capital Gains
| Short-term | Long-term | |
| How long did you own the asset? | Less than 1 year | Greater than 1 year |
| Tax rates | 10% – 37% | 0% – 20% |
Capital Gains Tax Rates, 2023
| Tax bracket | Single | Married filing jointly | Head of household |
| 0% | $0 – $44,625 | $0 – $89,250 | $0 – $59,750 |
| 15% | $44,626 – $492,300 | $89,251 – $553,580 | $59,751 – $523,050 |
| 20% | $492,301+ | $553,581+ | $523,051+ |
Let’s look at an example involving a hypothetical pair: Robert and his father (both US citizens).
Assume Robert’s father:
- Bought a seaside home in Cornwall, England for $500,000 in 2018
- Installed a new heating and cooling system for $50,000 in 2019
- Gave Robert the house as a gift in 2020
- Robert sold the house in 2023 for $750,000
The house’s adjusted basis (i.e., Robert’s cost) is $550,000 ($500,000 purchase price + $50,000 capital improvement).
Consequently, Robert’s capital gain is $200,000 ($750,000 sale price – $550,000 adjusted basis).
He’ll have a 15% capital gains tax rate and pay a capital gains tax of $30,000*
Exclusions from capital gains tax
It’s time for a small celebration: If the house you sell meets the following requirements, you can exclude up to $250,000 of capital gains from your income, tax-free.
To meet the home sale exclusion, you must fulfill both of the following criteria:
- You must have used the home as your primary residence at least two of the last five years immediately preceding the sale
- You must have been the owner of the property for two of the five years
- You may not have claimed a previous home sale exclusion within the previous two years
Gift tax
The IRS defines the gift tax as “a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.”
Calculation of gift tax
When you gift someone a house, cash, or any property, you should be aware of the gift tax rules.
However, because of limits the IRS sets, it is rare to owe gift tax.
The requirement the giver may have to fulfill is to file a gift tax return on Form 709 to disclose the gift.
Exclusions from gift tax
The IRS says you can give away $17,000 to someone each year without paying a cent of tax.
But if you give more than that, you generally must file a gift tax return on Form 709 to disclose the gift. However, while you may need to file Form 709 for giving away more than $17,000 to someone, you generally won’t have to worry about paying gift tax until you give away more than $12.92 million in your lifetime. In fact, gifting property strategically is a common strategy employed when estate planning. It can be a particularly interesting course of action when the recipient of the gifted property is a foreign spouse, or non-resident alien.
Read more about Gifting Property To A Foreign Spouse And US Expat Taxes.
Tax implications of selling inherited property
If the house you want to sell is one you received as an inheritance, you will want to familiarize yourself with the estate tax and bear in mind capital gains tax.
What is the estate tax?
An estate tax is payable by the deceased’s estate if the gross value of the estate exceeds $12.92 million. This threshold was established during the Trump Administration and will drop to $6 million in 2026.
The value of an estate is calculated based on everything the decedent owned, including homes, cars, jewelry, art, investments, etc.
Calculation of estate tax
For estates valued at more than $12.92 million, estate tax calculations use graduated tax brackets similar to the income tax.
The rate of estate tax ranges from 18% to 40% depending on the gross value of the estate, less certain debts and expenses.
Capital gains tax on inherited house
Like a gifted house, you may be liable for capital gains tax when you sell a house you inherited.
Calculation of capital gains tax
Take note: Selling an inherited house can mean significantly less capital gains tax than selling a gifted home.
That’s because, when figuring out the capital gains tax for an inherited house, your basis (i.e., cost) will not be the gifter’s cost, as is the case with a gifted house, but instead the stepped-up fair market value (FMV) of the house on the date that the decedent passes.
Let’s revisit our earlier example with Robert and his seaside home in Cornwall.
As a reminder, Robert’s father:
- Bought a seaside home in Cornwall, England for $500,000 in 2018
- Installed a new heating and cooling system for $50,000 in 2019
But in the example where Robert inherits the property, Robert’s father:
- Passed away in 2020, and Robert inherited the house when its FMV was $700,000
- Robert sold the house in 2023 for $750,000
The house’s adjusted basis (i.e., Robert’s cost) is $700,000.
Consequently, Robert’s capital gain is $50,000 ($750,000 – $700,000).
He’ll have a 15% capital gains tax rate and pay capital gains tax of $7,500, or four times less than the amount he would owe had the home been gifted to him prior to his father’s passing.
Exclusions from capital gains tax
If you use the inherited home as your primary residence, you can claim the $250,000 home sale exclusion if you meet the eligibility criteria.
Comparison: tax implications of selling gifted property VS selling inherited property
To tie this together, we’ll summarize the similarities and differences that come with selling a gifted house versus selling an inherited house.
Similarities of selling gifted property VS selling inherited property
Whether you’re selling a gifted house or an inherited house, the only tax you likely have to pay is capital gains tax.
If you satisfy the requirements, both sales can qualify for the $250,000 home sale exclusion.
Also, in both cases, once the sale is final and the money has arrived, you will likely need to file a Foreign Bank Account Report (FBAR) if the money is deposited in a foreign bank account.
Lastly, in both cases, you should capture the sale by filing IRS Form 8949.
Differences between “selling a property that was gifted to me” and selling inherited foreign property
The way capital gains tax is assessed for an inherited house differs from how it’s assessed for a gifted house.
🔑The key issue is that a gifted house attracts a carryover basis from the previous owner, while an inherited house comes with a stepped-up basis equal to the house’s fair market value at the time of the donor’s death.
Factors to consider
The Tax Cuts and Jobs Act of 2017 significantly expanded the estate tax exclusion thresholds and is set to expire after 2025.
After that, the exclusion limits may fall by as much as half. As a result, now could be the best time to make high-value gifts and take advantage of the expanded thresholds before they expire.
Navigating the tax minefield
Understanding the tax implications of selling a house can be complicated, especially for US expats. This is because US citizens and Green Card holders living abroad also need to consider the tax implications associated with selling an inherited property or selling a gifted property in their country of residence.
Work with a Bright!Tax CPA to chart your most advantageous tax path forward
At Bright!Tax we have proven professional experience handling complex tax cases, and we strive to leave our clients feeling financially empowered. What’s more, for our US expats based in Canada and the UK, we are pleased to offer both foreign tax prep and US tax prep services thanks to our Canadian and UK tax partners. We invite you to contact us today for a fully personalized quote from our dedicated expert expat CPAs.
