Sale of Primary Residence
US tax treatment
If you are a US taxpayer, it is important to be wary of the potential capital gain on the sale of your main home (whether in the US or abroad), as the sale could result in US tax liability. The potentially taxable gain is calculated by taking gross proceeds, deducting selling costs such as legal and estate agent fees, then deducting original acquisition costs and improvement costs incurred throughout the period of ownership. These amounts must be converted into USD from any foreign currency at the relevant exchange rates to calculate the “initial” capital gain in USD.
If your primary residency sale results in a USD loss then no US tax is incurred. This loss cannot be used to offset any other capital gains in the year.
If you do incur a capital gain on the sale of your main home, you may qualify to exclude up to $250,000 of that gain (or up to $500,000 if you file jointly) from US tax by utilizing the Section 121 exclusion.
To qualify for the Section 121 exclusion, you need to have owned and occupied the property for at least two of the previous five years (with certain limited exceptions). The exclusion is lost completely if the property is sold more than three years after it ceases to be your main home. Many people rent their home for a few years if they move to another country to work temporarily and can easily be caught out by this rule as a result. Please see our page on rental properties for more information.
You’re also not generally eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
The exclusion is applied to the initial capital gain to arrive at the taxable gain amount. The remaining gain will be subject to US tax at the appropriate long-term rate (usually 15%, but lower for low-income taxpayers, or 20% for those on high incomes).
If you redeem a mortgage at the same time as selling a home you may have to consider whether a “foreign currency mortgage gain” has been made for US tax purposes – see here for more information.
Some US taxpayers think that gains can be “rolled over” when they buy a new property. This is a common misconception - it was only possible to do this for sales prior to 1997.
If you are a US taxpayer, it is important to be wary of the potential capital gain on the sale of your main home (whether in the US or abroad), as the sale could result in US tax liability. The potentially taxable gain is calculated by taking gross proceeds, deducting selling costs such as legal and estate agent fees, then deducting original acquisition costs and improvement costs incurred throughout the period of ownership. These amounts must be converted into USD from any foreign currency at the relevant exchange rates to calculate the “initial” capital gain in USD.
If your primary residency sale results in a USD loss then no US tax is incurred. This loss cannot be used to offset any other capital gains in the year.
If you do incur a capital gain on the sale of your main home, you may qualify to exclude up to $250,000 of that gain (or up to $500,000 if you file jointly) from US tax by utilizing the Section 121 exclusion.
To qualify for the Section 121 exclusion, you need to have owned and occupied the property for at least two of the previous five years (with certain limited exceptions). The exclusion is lost completely if the property is sold more than three years after it ceases to be your main home. Many people rent their home for a few years if they move to another country to work temporarily and can easily be caught out by this rule as a result. Please see our page on rental properties for more information.
You’re also not generally eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
The exclusion is applied to the initial capital gain to arrive at the taxable gain amount. The remaining gain will be subject to US tax at the appropriate long-term rate (usually 15%, but lower for low-income taxpayers, or 20% for those on high incomes).
If you redeem a mortgage at the same time as selling a home you may have to consider whether a “foreign currency mortgage gain” has been made for US tax purposes – see here for more information.
Some US taxpayers think that gains can be “rolled over” when they buy a new property. This is a common misconception - it was only possible to do this for sales prior to 1997.
UK tax treatment
If you are a UK resident
The UK does not tax gains on the sale of your primary residence (in the UK or outside the UK) providing that several conditions are met:
If any of those point do not apply, you may still qualify for partial Private Residence Relief (PRR) to exclude a portion of the taxable gain.
PRR allows you to exclude gains for periods of occupation on a proportional basis. To qualify for PRR, whether full or partial, you must have lived in your home as your only or main residence at some point while you owned it. There are additional rules that may allow relief for periods of absence or deemed occupation. HMRC rules also state that the last 9 months prior to the disposal are always deemed occupation (for home sales after 6 April 2020).
Reporting and paying UK Capital Gains Tax on property
Since 6 April 2020, UK taxpayers have been required to separately report and pay any capital gains tax due on the sale of residential property (if any) within a short space of time after the sale (60 days for sales after 27 October 2021, 30 days before that) through the HMRC online service: Report and pay Capital Gains Tax on UK property - GOV.UK. It is important that you do not wait until your tax return is due to report the gain and pay the tax, otherwise penalties and interest may be due.
If you are not a UK resident
In most cases, non-residents are not required to report (and are not liable for the tax on) capital gains in the UK; however, since 5 April 2015, non-residents have been charged on capital gains made on the sales of UK residential properties, including those resulting from the sale of a primary residency when a taxpayer leaves the UK. Similarly to UK residents, you are required to report sales of your property via the HMRC online service within the same short time frame (60 days for sales after 27 October 2021, 30 days before that).
Due to the change in legislation, only the gain from such properties arising after 5 April 2015 is chargeable. The taxpayer can also still use PRR as mentioned above.
Even if the sale results in no gain, non-residents are still required to report the sale of the property through the HMRC online service. We recommend always contacting your advisor if you plan on selling your property. For more information on how Jaffe & Co can assist with property sale reporting, please get in touch and we will be glad to see if we can help.
If you are a UK resident
The UK does not tax gains on the sale of your primary residence (in the UK or outside the UK) providing that several conditions are met:
- You used the property as your main home for the entire period of ownership;
- You did not rent all or part of the property to tenants;
- Part of your home was not exclusively used for business purposes;
- The grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total;
- You did not buy the property just to make a gain.
If any of those point do not apply, you may still qualify for partial Private Residence Relief (PRR) to exclude a portion of the taxable gain.
PRR allows you to exclude gains for periods of occupation on a proportional basis. To qualify for PRR, whether full or partial, you must have lived in your home as your only or main residence at some point while you owned it. There are additional rules that may allow relief for periods of absence or deemed occupation. HMRC rules also state that the last 9 months prior to the disposal are always deemed occupation (for home sales after 6 April 2020).
Reporting and paying UK Capital Gains Tax on property
Since 6 April 2020, UK taxpayers have been required to separately report and pay any capital gains tax due on the sale of residential property (if any) within a short space of time after the sale (60 days for sales after 27 October 2021, 30 days before that) through the HMRC online service: Report and pay Capital Gains Tax on UK property - GOV.UK. It is important that you do not wait until your tax return is due to report the gain and pay the tax, otherwise penalties and interest may be due.
If you are not a UK resident
In most cases, non-residents are not required to report (and are not liable for the tax on) capital gains in the UK; however, since 5 April 2015, non-residents have been charged on capital gains made on the sales of UK residential properties, including those resulting from the sale of a primary residency when a taxpayer leaves the UK. Similarly to UK residents, you are required to report sales of your property via the HMRC online service within the same short time frame (60 days for sales after 27 October 2021, 30 days before that).
Due to the change in legislation, only the gain from such properties arising after 5 April 2015 is chargeable. The taxpayer can also still use PRR as mentioned above.
Even if the sale results in no gain, non-residents are still required to report the sale of the property through the HMRC online service. We recommend always contacting your advisor if you plan on selling your property. For more information on how Jaffe & Co can assist with property sale reporting, please get in touch and we will be glad to see if we can help.
Our motto: "Never ignore a letter from the IRS (or HMRC)"