Selling your U.S. house while living abroad

You moved abroad three years ago and held onto your U.S. house — maybe renting it out, maybe leaving it empty, maybe between tenants. Now you've decided to sell. The question is: how is the gain taxed when you're a U.S. citizen living overseas?

The answer is mostly good news for U.S. citizens (much worse for green-card-holders-turned-residents-elsewhere, and worst for non-resident aliens). This article covers the U.S. side, the state side, and the foreign side of the sale.

The good news: Section 121 still works for you

The U.S. tax code's Section 121 exclusion lets you exclude up to $250,000 of gain from the sale of your principal residence ($500,000 if married filing jointly), provided you meet:

• Ownership test: you owned the home for at least 2 of the last 5 years.
• Use test: you used the home as your principal residence for at least 2 of the last 5 years.

These tests are independent — the 2-year periods don't have to be the same years.

The key: for U.S. citizens, Section 121 doesn't care where you live now. A U.S. citizen who lived in the home for 5 years, then moved abroad and rented it out for 2 more years, still qualifies for the full $250K / $500K exclusion if they sell within the 5-year window after moving.

The 5-year ownership-and-use lookback is the critical timer. Sell within 5 years of moving out, and you can use Section 121. Wait too long, and the use test fails.

Example: U.S. couple moves abroad, sells 3 years later

• Bought house in 2017, lived there until June 2023.
• Moved to Berlin June 2023; rented out the house.
• Sell house June 2026.
• Looking back 5 years from sale (June 2021 – June 2026): they used the house as principal residence June 2021 to June 2023 = 2 years. They owned it the entire time = 5 years. Both tests met.
• $500,000 of gain excluded (MFJ).

Example: same couple, sell after 5 years abroad

• Sell house June 2028.
• Looking back 5 years from sale (June 2023 – June 2028): they used the house June 2023 → never (already gone). Use test fails.
• No Section 121 exclusion. Full capital gain taxable.

The implication: if you plan to sell your former U.S. home, do it within the 5-year window after moving out. Past that, you lose the exclusion.

The §121 partial exclusion

If you don't meet the full 2-year tests, you may still qualify for a partial exclusion if the sale is due to:

• A change in place of employment (50+ miles farther from old home), or
• Health reasons, or
• "Unforeseen circumstances" (defined narrowly — death, divorce, multiple births, job loss, etc.)

The partial exclusion is prorated: (months of qualifying use / 24) × the full exclusion. A 12-month-use sale qualifying under the employment test gives 50% of the $250K/$500K.

A move abroad for a job typically qualifies for the partial exclusion if you've owned less than 2 years.

The depreciation-recapture trap

If you rented out the house during your time abroad, you've been depreciating it (or you should have been). When you sell, the IRS recaptures the depreciation:

• Depreciation recapture is taxed at ordinary income rates up to a 25% cap.
• It's not covered by Section 121 — the exclusion only applies to the gain above the depreciation.

A house you bought for $400K, depreciated by $30K, and sold for $700K has:

• $30K of depreciation recapture (taxed at up to 25%)
• $270K of remaining capital gain
• Section 121 (if you qualify) shelters the $250K or $500K of the remaining gain.

If you didn't formally claim depreciation while renting (some people forget), you still owe recapture on what you should have claimed. "Allowed or allowable" — the IRS doesn't let you out of recapture by not having claimed it. Form 3115 can sometimes help retroactively.

Capital gains tax on the rest

Gain above the Section 121 exclusion is long-term capital gain if you owned more than a year (you have, since you've been abroad for years). U.S. rates:

• 0% on long-term gains below ~$47K single / $94K MFJ
• 15% on gains up to ~$518K single / $583K MFJ
• 20% above
• Plus the 3.8% Net Investment Income Tax (NIIT) if your modified AGI is above $200K single / $250K MFJ

For most expat sales, the gain after exclusion lands in the 15% bracket. NIIT often applies because U.S.-source rental and investment income often pushes MAGI above the thresholds.

FIRPTA — usually doesn't apply to you

The Foreign Investment in Real Property Tax Act (FIRPTA) requires the buyer of U.S. real estate to withhold 15% of the sales price if the seller is a "foreign person."

A U.S. citizen is not a foreign person, regardless of where they live. FIRPTA does not apply to your sale.

To prevent the buyer (or the title company on their behalf) from withholding anyway, you can provide a certification of non-foreign status — a simple notarized statement that you are a U.S. citizen, with your SSN. The title company keeps it on file and FIRPTA withholding is bypassed.

Green-card holders are also treated as U.S. persons for FIRPTA. Former green-card holders who abandoned the card via Form I-407 are foreign persons for FIRPTA — they should expect 15% withholding.

State capital-gains tax

This is where it gets state-specific.

No state income tax (Florida, Texas, Nevada, Washington, South Dakota, Tennessee, Wyoming): no state-level cap-gains tax on the sale. Just U.S. federal.

State income tax but you've severed residency: you owe non-resident state tax only on the gain from the property — but the rate may match the resident rate.

Sticky states (California, New York, New Mexico): if you didn't properly sever residency, you may owe resident state tax on the entire gain, not just the property-source portion. See state residency when abroad.

California, in particular, will pursue former Californians selling California property for years. The state Form 593 withholding (3.33% of sales price) applies regardless of where the seller lives — you reconcile it on your California non-resident return.

If you can sequence the sale year carefully (after a clean residency severance), you minimize state exposure.

The foreign-country side of the sale

Your country of residence will also be interested in the gain.

• Most countries tax worldwide capital gains for tax residents, with their own rates and rules.
• Some countries don't tax foreign-property gains (limited list — Singapore on capital gains, the UAE, Hong Kong on non-business gains, etc.).
• Most others tax the gain and offer a foreign tax credit for the U.S. tax paid, similar to how the U.S. side works for foreign income.

The math:

• U.S. tax on the gain: federal + state if applicable.
• Foreign country tax on the gain.
• Foreign Tax Credit on your U.S. return (Form 1116, passive category): the U.S. tax is offset by the foreign tax up to the U.S. tax on the foreign-source portion. See Form 1116.
• Net result: you pay the higher of the two countries' tax rates, not double.

The complication: the foreign country may not recognize Section 121. Even though the U.S. excludes $250K / $500K of gain, the foreign country may tax the full gain. The FTC can offset some of this but only against the U.S. tax actually owed — which is small after Section 121. Net: you may owe substantial foreign tax that has no U.S. credit to offset.

For high-gain sales (over the §121 exclusion plus the basis), this is usually manageable. For sales near the exclusion threshold where the U.S. side owes $0, the foreign country may end up taxing the entire gain with no FTC offset available.

Selling-year reporting

The sale appears on:

• Form 8949 + Schedule D of your 1040 — reports the sale, basis, gain.
• Form 4797 if portion was rental — recapture flows here.
• Section 121 exclusion claimed on Schedule D.
• State non-resident return if state applies.
• FBAR if proceeds went into a foreign account that crossed the $10K threshold (almost always yes).
• Foreign country return under its own rules and timeline.

The closing and proceeds flow

How the money moves matters for FBAR:

1. Wire to U.S. account → no new FBAR exposure for the proceeds themselves; standard 1040 reporting.
2. Wire to foreign account → the foreign account balance jumps. Almost certainly crosses $10K. FBAR-reportable for that year.
3. Wire to U.S. account, then to foreign account → the foreign account still crosses the threshold during the year. FBAR-reportable.

The fact of the FBAR filing isn't a problem — it's just a filing. The problem is failing to file because "I didn't know."

Common selling-from-abroad mistakes

• Missing the §121 5-year window. Sell while you still qualify.
• Not claiming depreciation during rental years, then owing recapture anyway.
• Allowing FIRPTA withholding when you're a U.S. citizen and don't have to.
• Selling while sticky-state-resident. California pursues you for years.
• Not realizing the foreign country will tax the gain ignoring §121.
• Wiring proceeds to a foreign account without filing FBAR for that year.
• Forgetting NIIT — adds 3.8% to high-income filers' gain.

The pre-sale checklist

If you plan to sell within the next 6 months:

1. Verify §121 eligibility. Run the ownership and use tests against the sale date.
2. Calculate depreciation recapture. Pull rental returns from the years abroad.
3. Get a §121-aware closing attorney. Tell the title company you're a U.S. citizen non-resident; bypass FIRPTA.
4. Sever state residency if you haven't and you're from a sticky state.
5. Check destination country's treatment of the gain — and whether §121 carries over.
6. Plan the proceeds wire with FBAR awareness.
7. Pre-pay U.S. estimated tax on the expected gain if it'll be substantial — avoids underpayment penalties.

Next steps

• Capital gains from abroad
• State residency when abroad
• Foreign Tax Credit (Form 1116)
• Retiring abroad checklist
• What is FBAR?