It is common for foreign professionals to become U.S. tax residents and later sell property they still own overseas. Consider Sofia, a Colombian architect who moves to the United States, meets the substantial presence test, and becomes a U.S. tax resident. Two years later, she sells her apartment in Bogotá that she owned long before relocating. Even though the home is located outside the U.S. and the sale is taxed in Colombia, once Sofia is a U.S. tax resident she must report the transaction to the IRS because the United States taxes residents on worldwide income, including capital gains from foreign real estate.
This guide explains when and how a foreign home sale must be reported, and what exclusions or credits may reduce or eliminate U.S. tax.
Worldwide Income Rule for U.S. Tax Residents
Once an individual becomes a U.S. tax resident (whether by green card or substantial presence), the IRS treats them the same as a U.S. citizen for income tax purposes. This means all income and gains worldwide must be reported, including gains from the disposition of foreign property.
Practical result: Selling a home abroad is a reportable capital transaction on the U.S. tax return, even if the foreign country also taxes it.
How the Sale Is Reported to the IRS
Foreign real estate is a capital asset. The sale is reported on:
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- Form 8949 (Sales and Other Dispositions of Capital Assets)
- Schedule D (Capital Gains and Losses)
These are the same forms used for U.S. real estate sales; the location of the property does not change the reporting obligation.
Currency Conversion Rules: A Frequent Source of Errors
Because the property sale occurs in a foreign currency, the U.S. gain must be computed in U.S. dollars, not in local currency. The taxpayer must convert:
- Cost basis (purchase price and improvements) into USD using exchange rates at the time those costs were paid; and
- Sale proceeds into USD using the exchange rate on the sale date.
Even if there is little or no gain in local currency, currency appreciation against the dollar can create a taxable gain in USD.
Can the Home Sale Exclusion Apply to a Foreign Home?
Yes. The Section 121 principal residence exclusion can apply to a home located abroad if the taxpayer meets the ownership and use tests:
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- Owned the home for at least 2 of the last 5 years, and
- Lived in it as a principal residence for at least 2 of the last 5 years.
If qualified, the taxpayer may exclude up to:
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- $250,000 of gain (single), or
- $500,000 (married filing jointly).
The exclusion is not limited to U.S.-located homes.
If the taxpayer no longer used the home as a main residence within the 5-year window (because they moved to the U.S. long ago), the exclusion may be reduced or unavailable.
Foreign Taxes Paid on the Sale
If the foreign country taxes the gain, the taxpayer may be able to claim a Foreign Tax Credit (FTC) on the U.S. return, typically on Form 1116, to reduce double taxation.
Key point: The sale must still be reported in full to the IRS even when treaty benefits or foreign tax credits eliminate U.S. tax.
Relevance for Taxpayers
Foreign nationals who become U.S. tax residents often assume that selling a home abroad is “outside the IRS system.” That is incorrect. The IRS requires worldwide reporting, and foreign home sales can create unexpected U.S. gains due to currency conversion rules. Proper compliance ensures that taxpayers:
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- Meet worldwide income reporting rules,
- Correctly calculate gain in U.S. dollars,
- Claim the Section 121 exclusion when eligible,
- Use foreign tax credits to avoid double taxation, and
- Avoid high penalties tied to international reporting forms.
We Can Help!
At JH Tax Law, we assist foreign professionals and international families with the U.S. tax consequences of selling foreign property. Our team handles foreign home sale reporting, section 121 exclusion analysis for overseas residences, currency conversion and basis reconstruction, and foreign tax credit strategy.
Contact our office for a confidential consultation today!
