Owning Real Estate while Living Abroad
Many U.S. Citizens are aware of the $250,000 ($500,000 if married filing jointly) exclusion on the gain from a sale of a home in a qualifying transaction. The following general requirements must be met to qualify for the exclusion: You must have owned and occupied the home as a principal residence for at least two out of five years prior to the sale, and, during the two-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
What is lesser known is the fact that any portion of the gain attributable to non-qualified use of the property is ineligible for the exclusion. Non-qualified use includes periods during which the property is not used as an individual’s principal residence (including when it is rented out). The maximum exemption amount is reduced on a pro-rated basis.
Let’s use a simplified example to illustrate. Jane Smith (a single taxpayer) buys a house for $100,000 on Jan. 1, 2000. She lives in the house for five years, then moves abroad. On Jan. 1, 2012 (seven years later), Jane returns to the U.S., and begins living in her house again. On Jan. 1, 2014 (two years later), she sells the house for $350,000, at a gain of $250,000.
Jane meets both of the above requirements. However, seven of the 14 years she has owned the house falls under non-qualified use. Therefore, only half of the maximum exemption amount applies. Jane will have to pay capital gains tax on $125,000.
There is one important exception to the non-qualified use rule. Non-qualified use does not include any portion of the five-year period preceding the sale that is after the last date that the property is used as a taxpayer’s principal residence. In plain English, if you own a home and leave the U.S. without selling the property, sell it within three years (and don’t move back into the home). That way, you qualify for the two years of five years requirements, and you will not be subject to a reduction in the maximum exemption amount. Note: Foreign Service employees are subject to different rules.
If you would like to submit a tax-related question, please email: firstname.lastname@example.org.
Responses are provided by John Ohe (IRS-authorized enrolled agent), who resides in Antigua.
Disclaimer: The answers provided in this article are for general information, and should not be construed as personal tax advice.
Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances.