What is the ownership and use test?
If you have owned and used the home as your principal residence in two years out of the past five years, you can exclude the first $250,000 USD of the capital gain you receive for the home. This two-year period does not need to be consecutive.
The calculation of the capital gain takes into account the foreign exchange rate at time of acquisition and sale of the house.
Is there a capital gains exclusion for the sale of a rental property?
When selling a rental property, it is taxed differently to the sale of your principal residence. There is no capital gains exclusion and any profit made on the sale of a rental property is taxable.
You will also need to be aware of and plan for depreciation recapture taxes. If you hold property, you can write off depreciation as an expense. The IRS can collect profit from the sale of a rental property which the taxpayer has previously used to offset their taxable income. So effectively, the IRS is asking for this money back.
What if I’m married to a non-US person?
If you are married to non-US person, you can add them to your US tax return with an eligible ITIN (Individual Taxpayer Identification Number) for the year you are selling the property, and file as married filing jointly. If your spouse also meets the ownership test you will then receive the doubled exclusion amount of $500,000 USD, even if you’ve never had them on a tax return before.
How do I report the sale of a house on my US tax return?
You will have to report the sale of your foreign home on your US income tax return for the year the sale occurred. For example, if you sold your house in 2020, this would need to be reported on your 2020 US tax return.
You need to report the capital gain on Schedule D of Form 1040 on your tax return. In this you will need to include the following information:
– The date of the purchase.
– The date of the sale.
– The purchase price.
– The sale price.
– Any capital losses, such as from home improvements or related fees.
Can I deduct off the amount of capital gain from the sale of a house?
It Is possible to deduct any costs that were made for home improvement to reduce the total capital gains on the sale.
There are two types of deductible expenses available to reduce capital gains:
1. Improvements to the home such as extensions or restorations to damages. There are limitations to this, as these improvements must change the value of the house. You cannot redecorate a perfectly good home to suit personal preferences and deduct this from the capital gains. Get a professional to assess what is deductible.
2. Selling expenses, such as commission fees for the estate agent and legal costs.
Does the capital gain exclusion change if I’m married to a US citizen or Green Card Holder?
If you are married to another US citizen or Green Card Holder, the capital gain exclusion will be doubled to $500,000 USD. So, you will not face capital gains tax on any amount from the sale that is under $500,000.
Can my spouse meet the ownership requirements if their name is not on the mortgage?
If the mortgage is only in the US person’s name, the non-US spouse would still meet the ownership test if their name was only on the title deeds.
Do I have to pay US tax if I’m self-employed in the UK?
For Americans operating as self-employed in the UK, generally they do not have to pay any US tax. There are, however, a few unique situations where you might pay a little bit of US tax.
For example:
If you are an American person receiving a £75,000 yearly salary and take an additional £2,000 dividend from shares you own which is tax free in the UK.
You would pay US taxes on the dividend portion as you paid no UK tax so there is no claimable foreign tax credit. With this income level, that dividend will be subject to 15% US tax. Assuming nothing else in the equation, you might have to pay $300 tax on the £2,000 dividend you received.
