Buying or Selling Property Abroad: 2026 US Tax Guide for Expats

Most US expats know about FEIE and PFIC traps. Far fewer know that selling a home in London can trigger a currency gain on the mortgage payoff even if the sale itself qualifies for the §121 exclusion. Or that renting out a Paris apartment requires 30-year ADS depreciation instead of 27.5. Or that buying through a French SCI can accidentally create a PFIC. Here is how US tax law applies to real estate abroad — the rules that matter before you buy, while you rent, and before you sell.

The §121 Exclusion Works for Foreign Primary Residences

IRC § 121 excludes gain from the sale of your "principal residence." The statute has no geographic restriction — a foreign home qualifies if it is genuinely where you live. The two-part eligibility test is the same as for a US home:¹

• Ownership test: you owned the home for at least 2 of the 5 years ending on the sale date
• Use test: you used it as your principal residence for at least 2 of the same 5 years

The 2-year periods for ownership and use do not need to be simultaneous, but both must fall within the 5-year lookback window. Brief absences (vacation, medical treatment) generally count as time used.

Three exceptions that can reduce or eliminate the exclusion:

• Depreciation recapture: any depreciation you claimed while renting the property must be recaptured at 25% (§1250 unrecaptured gain) and cannot be excluded under §121 — even if the rest of the gain is fully excluded
• Once-every-two-years limit: you cannot use the §121 exclusion on two sales within any 24-month period
• Non-qualifying use: periods of non-qualifying use (rental periods after May 6, 1997 that don't otherwise qualify) reduce the exclusion proportionally

Currency Gain on Your Foreign Mortgage: The Hidden Tax

This is the issue that surprises even sophisticated taxpayers. If you financed your foreign home with a local-currency mortgage, selling the home may trigger a separate taxable gain on the mortgage itself — measured by exchange-rate movement between when you borrowed and when you repaid — and this gain is distinct from the property gain that §121 excludes.

Here is the economic reality: you borrowed, say, £300,000 when GBP traded at $1.25 (a $375,000 US-dollar equivalent obligation). When you sell and repay the mortgage, GBP has moved to $1.40 — the same £300,000 now costs $420,000 to repay. You pay $45,000 more in dollar terms than you originally borrowed. That $45,000 is a real gain to the lender and a real cost to you — but does the IRS tax it?

The answer is complicated. IRC § 988 governs foreign-currency denominated transactions and would generally treat this as ordinary income or loss. However, the Tax Reform Act of 1986 conference report established that § 988 is inapplicable to the mortgage on a US individual's foreign principal residence — the "general principles of current law" apply instead.² Under those general principles, the currency movement on the mortgage may be characterized as part of the overall property transaction, but IRS guidance on the exact treatment remains limited.

Practical planning: document the outstanding principal balance in the foreign currency at closing. The gain or loss in dollar terms equals the dollar-equivalent of the payoff amount today versus the dollar-equivalent when you originally borrowed. A US-licensed expat tax specialist can model this before you set the closing date — timing matters when the currency is moving.

No §1031 Exchange for Foreign Property

Before 2018, IRC § 1031 allowed like-kind exchanges of foreign real property for other foreign real property within the same country. The Tax Cuts and Jobs Act of 2017 eliminated § 1031 for all property except US real property, effective January 1, 2018.³

This means: if you want to sell your Singapore condo and buy a villa in Portugal, there is no tax-deferred exchange mechanism. The gain on the Singapore property is fully taxable (subject to §121 if applicable; FTC for any Singapore CGT paid; LTCG rates apply to the US-taxable gain). You must pay US tax and reinvest after-tax proceeds. There is no equivalent of the 1031 rollover for foreign-to-foreign or foreign-to-US real estate.

Foreign Rental Property: 30-Year ADS Depreciation

If you rent out your foreign property, US tax law lets you claim depreciation — but not at the standard 27.5-year MACRS rate used for US residential rentals. Under § 168(g)(1)(A), any tangible property used predominantly outside the United States must use the Alternative Depreciation System (ADS). For residential rental property placed in service after December 31, 2017, the ADS recovery period is 30 years. For property placed in service before 2018, the ADS period is 40 years.⁴

What is depreciable: the building and improvements — not the land. If you convert a foreign primary residence to rental use, you establish a new depreciable basis at the lower of (a) fair market value at conversion or (b) your adjusted cost basis at conversion. The basis is translated to US dollars at the exchange rate on the conversion date.

The recapture catch: every dollar of depreciation you claim reduces your adjusted basis dollar-for-dollar. When you sell, the accumulated depreciation is recaptured at 25% (§1250 unrecaptured gain) — this recapture cannot be excluded by §121. A property that was rented for 10 years at $12,000/year of ADS depreciation has $120,000 of recapture exposure at 25% = $30,000 of federal tax that cannot be eliminated, even if §121 would exclude the rest of the gain.

PFIC Trap: Buying Property Through a Foreign Entity

In several countries, local law encourages or requires purchasing real estate through a local legal entity:

• France: Société Civile Immobilière (SCI) — a civil partnership used by families and co-investors
• Mexico: Fideicomiso (bank trust) — required for foreigners buying in coastal or border zones
• Indonesia: PT PMA or nominee structures — foreigners cannot hold land titles directly
• Italy: SRL or Società semplice for rental portfolios

If the foreign entity is classified as a foreign corporation for US tax purposes (not a partnership or grantor trust), it may be a Passive Foreign Investment Company under IRC §1297. A corporation is a PFIC if (a) more than 75% of gross income is passive — and rental income from a single property is entirely passive — or (b) more than 50% of assets produce passive income.⁵ A foreign corporation holding a single rental property almost certainly fails both tests and is therefore a PFIC by definition.

Being caught in a §1291 default PFIC means that when you eventually sell the property through the entity, your gain is subject to the excess-distribution regime: allocated rateably across your holding period, with each pre-current-year allocation taxed at the highest ordinary income rate (37% in 2026) plus an interest charge at the IRS underpayment rate (currently 7%) per year. The compounding interest penalty is punishing — see the PFIC Tax Impact Calculator on this site for an illustration.

Solutions when entity ownership is unavoidable:

• If the entity is eligible, make a check-the-box election (Form 8832) to treat it as a disregarded entity or partnership for US tax purposes — this removes it from PFIC analysis entirely
• If you inherited or acquired a PFIC-tainted entity, a QEF election (Form 8621) prospectively removes the interest-charge exposure going forward, though it requires annual inclusion of the entity's income
• Buy individually (in your own name) wherever legally permissible

Foreign Capital Gains Taxes and the FTC

When you sell foreign property, many countries impose their own capital gains tax. The US taxes the same gain. The Foreign Tax Credit (IRC §901, Form 1116) is the primary tool to prevent double taxation — but it is subject to the §904 limitation and works differently than most people expect.

Foreign CGT on real estate falls into the passive income basket on Form 1116. The FTC limitation caps your credit at the US tax you would owe on that same passive income. If §121 excludes your US-taxable gain entirely, your US tax on the gain is zero — meaning the §904 limitation is zero and the foreign CGT becomes a non-creditable stranded credit. You paid foreign CGT with no US offset available for it.

Reporting Obligations

Directly owned foreign real estate (title in your name, no entity) is not itself reportable on FBAR or Form 8938. However, several related reporting obligations often arise:

• FBAR (FinCEN 114): required if any foreign bank or financial account exceeds $10,000 at any point during the calendar year. Sale proceeds deposited in a foreign escrow or bank account, rental income sitting in a foreign account, or a foreign mortgage held in a reportable account — all may trigger FBAR.
• Form 8938 (FATCA): for specified foreign financial assets above the applicable threshold. Directly-owned real property is excluded from Form 8938. But if you hold the property through a foreign corporation, partnership, or trust, your interest in that entity IS a specified foreign financial asset and is reportable on Form 8938.⁶
• Form 5471: required annually if you own ≥10% of a foreign corporation holding the property. Penalties for non-filing start at $10,000 per year and can reach $50,000 per year per missed form.
• Form 3520 / 3520-A: if the holding structure is a foreign trust (other than the standard Mexican fideicomiso), annual trust reporting applies. The penalties for missed Form 3520 are 35% of the gross value of the trust's assets.
• Form 8865: if held through a foreign partnership (like a French SCI that is classified as a partnership, not a corporation).

Pre-Sale Planning Checklist

Before signing a sale agreement on foreign property:

• Confirm §121 eligibility. Tally your ownership and use periods within the 5-year lookback. If you rented the property for any period, calculate the non-qualifying-use reduction and recapture exposure before assuming you're fully covered.
• Model the mortgage currency gain/loss. Note the outstanding principal balance in the foreign currency and the exchange rate at your original loan origination date. The gain or loss in dollar terms = (current payoff in USD) minus (original borrowing in USD equivalent). Coordinate with your specialist on how to characterize and report this.
• Establish your USD cost basis. The original purchase price, closing costs, and improvements are translated to US dollars using the spot exchange rate on the date of each expense. If you didn't track this contemporaneously, reconstruct it from bank records and historical exchange rate data before closing.
• Quantify accumulated depreciation. If you rented the property, identify every year's ADS depreciation. Recapture at 25% cannot be excluded — know this number before you set a price.
• Check foreign withholding requirements. Some countries withhold at closing regardless of gain (France, Spain, Canada, Australia). Understand the process to recover withheld amounts and the timing gap between withholding and refund.
• Model the §904 FTC limitation. If §121 fully excludes your US gain, the foreign CGT may generate a stranded credit. Consider whether a partial §121 election (taking less than the full exclusion) could allow you to absorb some FTC.
• Time the close deliberately. A sale that closes on December 31 vs. January 1 shifts the gain into different tax years, potentially changing your FTC basket position, IRMAA lookback exposure, or FEIE eligibility year. The tax math on either side of the calendar year can differ substantially.

When You Need a Specialist

US expat real estate transactions routinely require coordination between two or more tax systems. Most US CPAs who don't specialize in international tax haven't seen the ADS depreciation requirement, don't know about the mortgage currency gain issue, and may miss the PFIC analysis for entity-held property. Most foreign conveyancers don't know you're filing a US return at all.

The situations most likely to go wrong without specialist review: selling a rental property and missing the ADS recapture calculation; closing a foreign home sale with a large foreign-currency mortgage and no analysis of the currency gain; buying through a local entity without checking the PFIC / check-the-box status; and assuming the §121 exclusion covers everything without checking the FTC stranding problem.