Selling Property in Australia as a U.S. Expat: U.S. Tax Guide

U.S. tax on foreign real estate sales

U.S. citizens are taxed on worldwide capital gains, including gains from the sale of real estate located abroad. The gain is generally the difference between the amount realized and the adjusted basis, both measured in USD using the applicable exchange rates. Purchase price, selling costs, improvements, and allowable adjustments can change basis, but the measurement is always in USD. A property that sold for the same number of Australian dollars as its purchase price can still produce a U.S. gain if the Australian dollar strengthened against the U.S. dollar.

Currency effects

The gain is calculated in USD using the exchange rate at purchase and the exchange rate at sale. A property that did not change in local currency value can still produce a U.S. gain or loss if the currency moved. This is a common source of surprise for expats selling foreign property. Keep the exchange-rate source and date with the closing statement, because later reconstruction is often impossible.

Principal residence exclusion

The principal residence exclusion may apply to a foreign home if the ownership and use tests are met. The exclusion is not limited to U.S. property. The tests require that the property was owned and used as a principal residence for at least two of the five years before the sale. Nonqualified use, second homes, and rental use can reduce or eliminate the exclusion. The exclusion is not a loss deduction, and a loss on the sale of a personal residence is generally not deductible.

Foreign tax credit

Australian tax on the sale may qualify for the Foreign Tax Credit, which can reduce U.S. tax. The credit is subject to sourcing rules, limitation categories, and the requirement that the foreign tax be a qualifying income tax. Not all foreign charges are creditable. Withholding is a payment on account and must be reconciled to the qualifying final foreign income tax, including refunds; penalties and interest are not income taxes. Reconcile the Australian computation with the U.S. computation before claiming the credit.

Australia-specific points

Foreign residents generally cannot claim the Australian main residence exemption for property sold after 30 June 2020 unless they satisfy the life events test. That test requires continuous foreign residency of six years or less and one of three events: a terminal medical condition for the taxpayer, spouse, or child under 18; the death of a spouse or child under 18; or a capital gains tax event arising from a formal agreement following relationship breakdown. Even a property that was a main residence for part of the ownership period does not receive a partial exemption if the test is failed. The full 50% Australian CGT discount is generally not available to foreign or temporary residents for assets acquired after 8 May 2012, although an apportioned discount may apply if there was a period of Australian residency during ownership. Foreign resident capital gains withholding and state or territory costs can also affect cash flow at closing. Those Australian rules do not automatically determine the U.S. result, and the U.S. gain is still computed in USD.

Reporting

The sale is generally reported on the U.S. return, typically on Form 8949 and Schedule D, even if there is no gain or if a loss is realized. The reporting requirements depend on the facts and the character of the property. Keep purchase and sale contracts, improvement invoices, rental history, currency records, and evidence of principal-residence use.

Common mistakes

• Calculating the gain in local currency instead of USD.
• Ignoring currency effects on basis and amount realized.
• Assuming the principal residence exclusion does not apply to foreign property.
• Assuming Australian main residence relief still applies after becoming a foreign resident.
• Not claiming the Foreign Tax Credit for foreign tax paid on the sale.
• Failing to document purchase and sale dates, prices, and exchange rates.

How the U.S. gain is calculated

The U.S. amount realized includes the sale price plus liabilities assumed by the buyer, less selling expenses such as broker commissions, legal fees, and transfer taxes. The adjusted basis includes the original purchase price, acquisition costs, capital improvements, and certain settlement charges, reduced by depreciation or casualty losses. Both sides are converted to USD. If the property was rented, depreciation can reduce basis and may be recaptured. If the property was inherited, basis may be stepped up or down depending on the facts and the decedent's status. A foreign-currency mortgage can create a separate foreign-currency gain or loss on repayment, which is not part of the property gain and may be reported elsewhere.

Records that support the return

Keep the purchase contract, closing statements, proof of improvements, rental and depreciation schedules, loan documents, and evidence of days of personal use. Keep bank records showing the exchange rate used for each payment and receipt. If a treaty or foreign tax credit is involved, keep the foreign assessment, withholding certificate, and proof of payment. If Section 121 is claimed, keep evidence of ownership, residence, and any periods of nonqualified use. If the property was sold at a loss, keep evidence that it was not a personal residence and that the loss is otherwise allowable.

When the foreign result differs from the U.S. result

Australia tax may use different timing, currency, exemptions, or cost rules than the U.S. A Australia exemption, withholding, or reduced rate does not by itself remove U.S. tax. The Foreign Tax Credit is limited to foreign income tax attributable to the same income and may not absorb all U.S. tax. Compute the U.S. gain first, then reconcile the foreign tax to that gain rather than relying on the foreign closing statement.

Planning the filing before closing

Before closing, model the U.S. gain in USD using a consistent exchange-rate source and decide whether Section 121 is available. If the property was rented, compute depreciation recapture separately from the capital gain. If foreign tax will be paid, estimate the foreign tax credit limitation by category and carryover. If the seller is a non-resident of the country where the property is located, confirm withholding, clearance, or reporting deadlines before signing. If the property is jointly owned, allocate gain, basis, and foreign tax to each owner. If the sale spans tax years or involves an installment sale, document the timing of payments and currency conversions.

A pre-closing review should also test whether the property qualifies as a principal residence for U.S. purposes, whether any period of nonqualified use applies, and whether a loss is actually deductible. These questions are easier to answer before the sale than after the funds have been moved.

Next steps

FileAbroad reviews the purchase, sale, currency, and foreign tax facts to determine the U.S. reporting. Use the intake form to describe the property, country, and tax years involved. See also: Foreign Inherited Property Sale Guide, Foreign Tax Credit Guide.