How to avoid capital gains tax on foreign property: US guide

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise US Inc. or its affiliates, and it is not intended as a substitute for obtaining business advice from a Certified Public Accountant (CPA) or tax lawyer.

Selling property abroad comes with a double tax obligation for American citizens and residents.

You'll owe taxes in the country where the property is located, and the US requires all taxpayers to report and pay taxes on worldwide income, including capital gains from foreign property sales.

You can't always eliminate your US tax bill, but there are quite a few strategies that can help you reduce what you owe. Here's how to avoid capital gains tax on foreign property sales.

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Table of contents

How are capital gains calculated when selling foreign property? How to avoid capital gains tax on foreign property 1. Use the primary residence exclusion 2. Claim the Foreign Tax Credit 3. Time your sale for long-term capital gains rates 4. Do a 1031 like-kind exchange 5. Offset gains with capital losses 6. Sell in a low-income tax year 7. Leverage tax treaty benefits Other tax implications when selling foreign property State income tax Depreciation recapture Foreign corporations or trusts Reporting requirements How to report the sale of foreign property

How are capital gains calculated when selling foreign property?

Capital gains tax applies to the profit you make when you sell an asset, such as your foreign property.

The calculation is relatively straightforward: Subtract what you originally paid for the property (plus any improvements and purchase costs) from your sale price, and the difference is your capital gain.

Here's the basic formula:

Sale price − (Purchase price + Improvements + Buying/selling costs) = Capital gain

For example, if you bought a property in Portugal for 200,000 USD, spent 30,000 USD on renovations, paid 5,000 USD in closing costs, and sold it for 300,000 USD, your capital gain would be 65,000 USD.

In the US, you pay capital gains tax based on how long you owned the property:¹

• Short-term gains (property held for 1 year or less) are taxed as ordinary income at rates up to 37%
• Long-term gains (property held for more than 1 year) qualify for lower rates of 0%, 15%, or 20%, depending on your total taxable income

Foreign countries have their own capital gains tax systems.

They may work similarly to the US system in calculating profit and applying a tax rate, but the specifics vary. Some countries tax gains at a flat rate, others use progressive rates, and a few don't tax capital gains at all.

Either way, as an American citizen or resident, you're responsible for both local and US capital gains taxes on your foreign real estate sale.

💡 Learn more about US taxes on foreign income in our full guide.

How to avoid capital gains tax on foreign property

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1. Use the primary residence exclusion

If the foreign property was your main home, you can exclude up to 250,000 USD of profit from US taxes, or 500,000 USD if you're married filing jointly.¹

This is one of the most valuable tax breaks available.

To qualify, you need to meet 2 requirements during the 5 years before you sell:¹
You owned the property for at least 2 years You lived in it as your primary residence for at least 2 years

These 2 years don't need to be consecutive or happen at the same time. You could own the property for 3 years as a rental, then move in and live there for 2 years before selling, and you'd still qualify.

The catch is that you can only use this exclusion once every 2 years. So, if you claimed it on another recent property sale, you'll need to wait.

2. Claim the Foreign Tax Credit

When you pay capital gains tax to a foreign government, you can claim a dollar-for-dollar credit against your US tax bill. The Foreign Tax Credit prevents "double taxation," or being taxed twice on the same income.

For example, let's say you sold property in France and paid 15,000 USD in French capital gains tax. When you file your US return, you report the same gain.

If your US tax on that gain would be 18,000 USD, you can credit the 15,000 USD you already paid to France. You'd only owe the IRS the 3,000 USD difference.

In some cases, the foreign tax rate is higher than the US rate. When this happens, you owe nothing to the US and can even carry forward any excess credit to use in future years.

You claim this credit on Form 1116.¹

3. Time your sale for long-term capital gains rates

In the US, the tax rate on your profit depends on how long you owned the property.

If you sell after owning the property for 1 year or less, your gain is taxed as ordinary income, and you can pay up to 37% depending on your tax bracket.¹

But if you wait until you've owned it for more than 1 year, you qualify for long-term capital gains rates of 0%, 15%, or 20%.¹

For most people, this difference is substantial and worth delaying the sale for.

4. Do a 1031 like-kind exchange

A 1031 exchange is a way to defer paying capital gains tax by reinvesting your sale proceeds into another property. You don't eliminate the tax, but you postpone it until you eventually sell the replacement property.

However, you can only exchange your overseas property for another overseas property. You can't swap your foreign property for a US property because the US tax law doesn't consider them "like-kind" to each other.

There are also other strict rules that you must follow, such as identifying your replacement property within 45 days of selling and completing the purchase within 180 days.¹

You'll also need to use a qualified intermediary to handle the transaction because you can't touch the money yourself.

Overall, if you want to keep investing in foreign real estate and don't need the cash from your sale, a 1031 exchange can be a good idea, but it's not the right choice for everyone, and it doesn't fully eliminate your tax obligations.

5. Offset gains with capital losses

If you have investment losses from other sources, you can use them to reduce or eliminate your capital gains tax.

Capital losses offset capital gains on a dollar-for-dollar basis. If you sell foreign property with an 80,000 USD gain and stocks with a 30,000 USD loss in the same tax year, you only pay tax on 50,000 USD.

You can use up to 3,000 USD in net losses every year to offset regular income.¹ Any losses beyond that amount carry forward to future tax years indefinitely.

This strategy requires planning, so it's best to consult with a knowledgeable tax advisor to take full advantage of this strategy without breaking any rules.

6. Sell in a low-income tax year

Your capital gains tax rate is based on your total taxable income for the year, so selling your foreign property when your other income is low can keep you in a lower tax bracket.

Sometimes, this strategy can even help you qualify for the 0% long-term capital gains tax rate.

Consider timing your sale for a year when you:

• Retire or take a sabbatical
• Have significant deductions (like medical expenses or business losses)
• Don't have other large income sources

Even if you don't qualify for the 0% rate, moving from the 20% bracket to the 15% bracket can save you thousands of dollars on a foreign property sale, especially if you made a lot of profit on it.

7. Leverage tax treaty benefits

The US has tax treaties with many countries that affect how foreign property sales are taxed.

These treaties typically allow the country where the property is located to tax the gain first and provide mechanisms to avoid double taxation.

Treaties don't eliminate your US tax obligations, but they clarify which country has primary taxing rights and make sure that you get proper credit for foreign taxes paid.

For example, the US-UK treaty allows the UK to tax gains from UK property, and the US must provide a foreign tax credit for those taxes.¹

Treaty provisions can be complex, so consult with a tax professional who understands international tax law and can help you claim all of the benefits that are different from standard US tax rules.

Other tax implications when selling foreign property

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State income tax

You don't only have to consider federal US taxes when selling foreign property. Many states also tax capital gains, and those rules are separate.

If you're a resident of a state with income tax, you'll likely owe state taxes on your foreign property sale. States like California, New York, and Virginia are particularly aggressive about maintaining tax jurisdiction over former residents who move abroad.

Check your state's rules to see if you have to pay state taxes on your gain, and if so, how much.

Depreciation recapture

If you rented out your foreign property at any point, you may have claimed depreciation deductions on your tax returns. When you sell, the IRS requires you to "recapture" that depreciation and pay tax on it.

Depreciation recapture is taxed at up to 25%, regardless of your regular capital gains rate.¹

It also applies even if you never actually claimed the depreciation on your returns. The IRS assumes you should have claimed it, and makes you recapture it either way.

For example, imagine you bought a rental property for 300,000 USD and claimed 50,000 USD in depreciation over 10 years. When you sell for 400,000 USD, your gain breaks down into two parts:

• 50,000 USD depreciation recapture (taxed at up to 25%)
• 100,000 USD appreciation gain (taxed at long-term capital gains rates)

You'll report this on Form 4797 in addition to the standard capital gains forms.¹

Foreign corporations or trusts

Some people hold foreign property through corporations, trusts, or other legal entities for liability protection or estate planning. This can create additional tax complexity.

For example, if you own property through a foreign corporation, you may face Passive Foreign Investment Company (PFIC) rules or Controlled Foreign Corporation (CFC) regulations.¹

Both come with complicated reporting requirements and potentially punitive tax treatment.

If you hold foreign property through any type of entity, work with a tax professional who specializes in international tax before selling.

Reporting requirements

Owning and selling foreign property often triggers 2 major reporting requirements: FATCA and FBAR.

These aren't additional taxes you have to pay, but if you don't file these forms on time, you may face high penalties and even criminal prosecution.

• FBAR: If your foreign financial accounts exceed 10,000 USD total at any point during the year, you must file FinCEN Form 114¹
• FATCA: If your foreign assets exceed certain thresholds, you must file Form 8938 with your tax return

For FATCA, the thresholds for when you have to file depend on your filing status and where you live (in the US or abroad).

Filing status	Living in the US²	Living abroad²
Single	50,000 USD (year-end) or 75,000 USD (any time)	200,000 USD (year-end) or 300,000 USD (any time)
Married filing jointly	100,000 USD (year-end) or 150,000 USD (any time)	400,000 USD (year-end) or 600,000 USD (any time)
Married filing separately	50,000 USD (year-end) or 75,000 USD (any time)	200,000 USD (year-end) or 300,000 USD (any time)

Foreign property itself doesn't count toward the FATCA threshold, but the sale proceeds often do (when deposited into a foreign financial account).

Learn more about FBAR vs. FATCA — they sound similar, but many Americans often need to file both. Filing one doesn't exempt you from filing the other.

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How to report the sale of foreign property

You'll likely need to file a few different forms to report your foreign property sale, including:

• Form 8949 (Sales and Other Dispositions of Capital Assets): This is where you report the sale details, such as purchase date, sale date, cost basis, sale price, and resulting gain or loss³

• Schedule D (Capital Gains and Losses): Transfer your totals from Form 8949 to Schedule D, which calculates your capital gains tax

• Form 1116 (Foreign Tax Credit): If you paid capital gains tax to a foreign government, you can claim your credit to reduce your US tax

• Form 4797 (Sales of Business Property): Use this form if the property was a rental or business property, especially when dealing with depreciation recapture

If you have to file FBAR and/or FATCA, you'll have to file Form 8938 for FATCA and FinCEN Form 114 for FBAR.²

Except for FBAR, which you have to file separately with FinCEN, you'll submit all forms with your regular Form 1040.

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There are ways to reduce capital gains tax on your foreign property sale, but you most likely won't be able to completely avoid it.

However, strategies like the primary residence exclusion, claiming foreign tax credits, and timing your sale can all help reduce your liability by a lot.

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Sources

1. Taxes for Expats - Capital gains tax on foreign property
2. IRS - Summary of FATCA reporting for US taxpayers
3. IRS - About Form 8949

Sources checked 12/16/2025