Capital Gains on Selling Foreign Property

When you sell a foreign home or investment property, the gain is subject to US capital gains tax — long-term rates apply if you owned it more than a year, just as with US property. If the foreign property was your primary residence and you lived in it for at least two of the five years before the sale, the $250,000/$500,000 home sale exclusion applies, potentially allowing you to exclude a large gain from US tax. One unique complication with foreign property is currency gains: if the local currency appreciated against the dollar while you owned the property, part of your gain may be a currency gain, which is taxed at ordinary income rates rather than capital gains rates. You'll need to convert both your original purchase price and your sale proceeds to US dollars using the exchange rate in effect on each date to calculate the correct gain. Any foreign tax paid on the gain is creditable on Form 1116 to reduce your US tax on the same income.