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Capital Gains Tax for U.S. Citizens Residing Abroad

Capital Gains Tax for U.S. Citizens Residing Abroad

Capital gains tax for U.S. citizens living abroad can be complex due to expatriate tax laws and regulations. Whether you are selling your home overseas or renting out a property, this is a process you will need to go through with the IRS. Here we describe exactly what capital gains tax is and how you can report it.


Explanation of capital gains tax

Quite simply, according to the Oxford Dictionary, a capital gain is a gain from the sale of real estate or investment. This is what you get when you subtract the purchase price of the asset from the selling price. Capital gains can be recognized when the asset is sold and can be short-term (one year or less) or long-term (more than one year).

For example, suppose you sell a house for more than the original sale price. To determine the capital gain, you can use this calculation:

The sale price of the house + additional costs (renovation, repairs)* - Purchase price of the house = capital gain

For example, if you sell the house for less than the original purchase price, it is called a capital loss.

Any asset that is sold and produces a capital gain is taxable by the IRS. This includes any business inside and outside the United States where capital gains are realized. Therefore, if you sell a yacht in Italy for a higher price than the original purchase price as an American expat, you will get a capital gain.

Most importantly, capital gains must be claimed when applying for U.S. income tax! The United States taxes any excess value from 0% to 20%, depending on your filing status.

Additionally, if you own an equity stake in a passive foreign investment company, you may be subject to a higher tax rate on those gains. As we said in the previous paragraph, this also applies to capital gains on global investments and assets. This includes whether what you sold is also subject to other (foreign) capital gains tax.


Short and long term gains

Did you know that there are short and long-term capital gains? 

Short-term gains occur when you own an asset (like shares in a company) for a year or less before it is sold. They will be taxed according to your tax limit.

Long-term gains are the opposite: you've owned your asset for over a year. Your long-term tax rates are probably between 0% and 20%, depending on your taxable income. In general, these tax rates will be lower than those for short-term capital gains.


Foreign Property

However, if you own foreign property in the U.S., you may or may not be required to pay capital gains tax.

In other words, any capital gain on the sale of qualifying homes greater than $250,000 is taxable in the United States. All of the following are exempt from capital gains tax. If you have lived in the U.K. for the past five years and sell a property that you own for $270,000 (when the original purchase price was $250,000), you will have a capital gain of $20,000, and you will not have to pay taxes in the United States. However, you might need to pay taxes to the U.K. (it depends on their laws).

Qualifying home sales can be made inside and outside the United States but must meet the following requirements:

In general, to be eligible for the Section 121 exclusion, you must complete the ownership test and the use test. You are eligible for the exclusion if you have previously owned your home and used it as your primary residence for at least two of the five years before the sale date. Ownership and use tests can be performed for more than two years. However, both tests must be passed within the five years ending on the date of sale.


IRS - Exclusion qualification

If you file a joint return with your spouse on capital gains from a qualifying home sale, the exemption from the limit increases to $500,000.


Reporting Capital Gains

Reporting your capital gains on Form 8949, Schedule D, and transferring them all to Form 1040 is the best option. Form 1040 is the annual U.S. income tax return that all Americans overseas must complete or have a professional do for them.

But what about reporting a loss of property? These will first be used to offset or balance your capital gains. But this should be offset by short-term losses with short-term gains and long-term losses with long-term gains. Once you have incurred the net loss, you can deduct it against the other type of profit.

For example: If you have a short-term loss of $5,000 and a short-term gain of $1,000, the short-term loss ($5,000) can be deducted from your long-term net gain (if applicable). But if a net capital loss for the year is larger, you can deduct up to $3,000 of the loss against other forms of income. Those who are married and filing separately can deduct their detention losses up to $1,500.


Paying capital gains tax in another country

Americans overseas who must also pay capital gains tax in a foreign country can claim the IRS tax credit when filing the U.S. tax return. Therefore, you can claim a tax credit of $1 for every dollar of tax you paid in another country. This prevents expatriates from America from paying double the capital gains tax.


FOR INFORMATION ON HOW JAMES FINANCIAL SERVICES, INC. CAN HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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