
Capital gains tax for expats is the tax on profits made from selling assets such as property, stocks, or bonds for more than their purchase price. The basic calculation is straightforward: sale price minus purchase price and improvements equals the capital gain. This tax applies to any asset that generates a profit, regardless of whether the sale occurs inside or outside the U.S.
Understanding capital gains tax for U.S. citizens living abroad is crucial, as it is taxable even if you are living out of the country. Your worldwide income, including any gains from assets sold outside the U.S., is still subject to U.S. tax law. It’s important to be aware of these rules to avoid penalties and ensure compliance.
Types of Capital Gains for American Expats
When it comes to capital gains tax, the holding period of the asset significantly impacts how much tax you owe. The two main types of capital gains are short-term and long-term, each with different tax rates.
Short-term gains
Short-term gains are the profits made from selling assets that have been held for one year or less. These gains are taxed at your regular income tax rate, which can be significantly higher than the tax rates for long-term gains. As a result, individuals who frequently trade assets or flip property are more likely to face a higher tax burden on their profits. This higher tax rate can be especially impactful for active traders or those in the real estate market, where properties are often bought and sold quickly.
Short-term gains apply to all types of assets, whether it’s stocks, bonds, real estate, or other investments.
Long-term gains
Long-term gains apply to assets that are held for more than one year before being sold. The tax rates for long-term gains are typically more favorable.
For 2025, the tax rates are as follows:
Single filers:
- 0% for up to $48,350
- 15% for $48,351 to $533,400
- 20% for over $533,400
Married filing jointly:
- 0% for up to $96,700
- 15% for $96,701 to $600,050
- 20% for over $600,050
Married filing separately:
- 0% for up to $48,350
- 15% for $48,351 to $300,000
- 20% for over $300,000
Head of household:
- 0% for up to $64,750
- 15% for $64,751 to $566,700
- 20% for over $566,700
Understanding the difference between short-term and long-term capital gains is essential for minimizing your tax liability. Holding assets longer can lead to significant tax savings, which makes strategic investing key to optimizing your tax situation.
Principal residence exclusion
The principal residence exclusion allows U.S. expats to exclude a significant portion of the capital gains from the sale of their home. Single filers can exclude up to $250,000 in capital gains, while married couples filing jointly can exclude up to $500,000.
To qualify for this exclusion, you must meet certain criteria. For example, you must own and use the home as your main residence for at least 2 out of the last 5 years before selling. These 24 months do not need to be consecutive, but they must fall within the 5-year period leading up to the sale of the property.
You can claim this exclusion once every two years, but you must satisfy both the ownership and use tests during the 5-year window before the sale. The exclusion applies to both primary homes and rental properties that meet the requirements.
For example, if you sell a property for $270,000 and meet the necessary qualifications, the capital gains from that sale could be excluded from taxation, up to the limits set by your filing status. This can result in significant tax savings, particularly for those who have lived in their homes for extended periods.
Reporting Requirements for Capital Gains
When reporting capital gains, U.S. expats must use Schedule D (Form 1040) for reporting capital gains and Form 8949 to report individual sales of assets, as mandated by the IRS.
Additionally, expats are required to report foreign assets under the Foreign Account Tax Compliance Act (FATCA). If the total value of foreign assets exceeds $50,000 at year-end or $75,000 at any point during the year, they must be reported to the IRS to ensure compliance with U.S. tax laws.
If the total value of foreign bank accounts exceeds $10,000 at any point during the year, expats must file the Foreign Bank Account Report (FBAR) to provide the IRS with a clear picture of financial activity in foreign accounts. This helps prevent tax evasion and ensures transparency in foreign transactions.
Another crucial consideration for expats is that all amounts must be reported in U.S. dollars. When filing, the amounts from foreign transactions must be converted to U.S. dollars using the exchange rates from the transaction dates.
Proven Tax Reduction Strategies
There are several strategies available to U.S. expats for reducing their capital gains tax liability. These strategies can help minimize the tax burden on the sale of assets, particularly for those living abroad.
Foreign tax credit
The Foreign Tax Credit allows expats to receive a dollar-for-dollar reduction on their U.S. tax liability for taxes paid to foreign governments. This credit applies specifically to taxes paid on property sales and prevents double taxation, ensuring that expats are not taxed both in the foreign country and by the U.S. on the same income.
Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) allows U.S. citizens living abroad to exclude foreign-earned income, such as wages and salaries, from U.S. taxation, up to $126,500 in 2024. To qualify, individuals must meet the Physical Presence Test, spending at least 330 days in a foreign country within 12 consecutive months, or the Bona Fide Residence Test, proving long-term residency abroad.
However, the FEIE applies only to earned income and does not extend to passive income, such as capital gains, dividends, or rental income. This exclusion is a key tool for reducing U.S. tax liability for many expats.
Like-kind exchange
A like-kind exchange (a.k.a 1031 exchange) is a valuable tool for expats who sell investment or business properties. This strategy allows taxpayers to defer capital gains tax by reinvesting the proceeds from a property sale into another similar property. The key benefit of this strategy is that it postpones the tax burden until the new property is sold, allowing the expat to defer taxation on the gains.
By using these strategies, U.S. expats can significantly lower their capital gains tax liability and make the most of their property sales. Consulting a tax professional is highly recommended to ensure compliance and maximize the benefits of these strategies.
Conclusion
Navigating capital gains tax is crucial for U.S. expats, especially when selling property or assets abroad. Tax-saving strategies such as the Foreign Tax Credit and like-kind exchanges can significantly reduce your overall tax liability and mitigate the risk of double taxation. However, proper reporting is essential to ensure compliance with U.S. tax laws and to minimize your liability.
At Expat CPA, we specialize in helping expats with tax forms, including Form 1116 for the Foreign Tax Credit and Form 2555 for the Foreign Earned Income Exclusion. Our tailored services ensure accuracy and efficiency in meeting your unique financial needs.
Take the next step to secure your financial future and schedule a free consultation with us today.