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Tax Law (Questions About Taxes)/Capital Gains on Primary Residences


QUESTION: Are American citizens who live in the UK and own a primary residence subject to Capital Gains tax in the US when they sell their primary residence?

ANSWER: Hi Marilyn, you may qualify to exclude from income up to $250,000 of gain from the sale of a personal residence if the following tests are met:

• Ownership and Use. The individual must have owned and used the home as a principal residence for at least two out of the five years prior to the sale (the two years do not have to be consecutive). See Divorce for an exception to the use test.

• Frequency Limitation. The exclusion applies to only one sale every two years.

If there is excess gain or you do not qualify for the residence gain exclusion, capital gains tax will apply.

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Randall Brody, EA

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---------- FOLLOW-UP ----------

QUESTION: Thanks Randall for your response.  I think perhaps I was not clear in my question. The question whether American citizens who have been living in the UK for many years and own a primary residence in the UK, who then sell their UK primary residence-are these American passport holders subject to capital gains tax in the US even though the primary residence was in the UK?  Thanks Marilyn

Hi Marilyn, as a US citizen, you are a subject to taxation on worldwide income (including the sale of your home in the UK).

The US is one of only two countries worldwide with a citizen-based tax regime in that US citizens are taxed on their worldwide income regardless of where they live/work in the world (i.e. residency).

Thus the reporting is the same as in the U.S. (and for a US-based property) in that capital gains must be reported and you would be eligible to claim the residence gain exclusion if qualified.

If there ends up being some capital gain that is not excludable, there are other tax benefits that you may qualify for, such as the foreign tax credit, that could help offset any double taxation for taxes due to the US on the gain (that have also been taxed in the UK).

Best regards,

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Randall Brody, EA, MBA, CCP


Tax Samaritan is a boutique firm specializing in the preparation of taxes and the resolution of tax problems for Americans living abroad, as well as the unique tax issues that apply to taxpayers that are gamblers, teachers, nurses and military.


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