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If you have a US primary residence and a EU secondary residence,is it possible to switch primary residency to the EU home in order to avoid capital gain tax if selling?

Forum|Forum|3 years ago
February 26, 2023
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I spend 5 months a year in my EU home. I have owned it for 20+ years, and have never rented it. If I'm looking to sell in 5 years, I would like to avoid paying any US taxes on the sale. I would appreciate any advice.

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Best answer by DavidD66

A principal residence abroad is any property you have lived in for at least two of the last five. When you sell your principal residence, you are eligible for a gain exclusion of $250,000 USD, or $500,000 USD for married principal owners. If you don’t qualify for the gain exclusion, any gain will be considered foreign income and thus eligible for the Foreign Tax Credit. This income is not considered foreign earned income and will not qualify for the Foreign Income Exclusion.

According to IRS Publication 523:

If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circumstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well. They are listed below. The more of these factors that are true of a home, the more likely that it is your main home.

The address listed on your:

U.S. Postal Service address,
Voter Registration Card,
Federal and state tax returns, and
Driver's license or car registration.

The home is near:

Where you work,
Where you bank,
The residence of one or more family members, and
Recreational clubs or religious organizations of which you are a member.

M

MAK70

If you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. You may be able to get a foreign tax credit if you pay taxes in the location of the property.

H

hindman203Author

Hi Mary,

Thanks. That answer I already knew. I'm more looking for options for the future sale of the EU home, that give me a clear view of taxation from a US perspective. My US home is currently my primary residence. I spend 5 months in the EU home every year, but could spend more if making it my primary residence helps, and if I need to spend 2 years of last 5 there.

I was hoping to find someone who knows the best plan tax wise in selling the EU home in the future. I know what the local laws/rules are, as well as the US rules on sale of a primary residence, but it's not clear when you have a US primary residence and an EU secondary residence. I am a US citizen and and EU resident. Neither home is rented. Is It a solution to switch residency for say 3 years or 5 years, then sell the EU home for example? Or is there another strategy? I'm not in a hurry, so I'm looking for solutions to minimize taxes.

Thanks.

D

DavidD66Answer

A principal residence abroad is any property you have lived in for at least two of the last five. When you sell your principal residence, you are eligible for a gain exclusion of $250,000 USD, or $500,000 USD for married principal owners. If you don’t qualify for the gain exclusion, any gain will be considered foreign income and thus eligible for the Foreign Tax Credit. This income is not considered foreign earned income and will not qualify for the Foreign Income Exclusion.

According to IRS Publication 523:

If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circumstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well. They are listed below. The more of these factors that are true of a home, the more likely that it is your main home.

The address listed on your:

U.S. Postal Service address,
Voter Registration Card,
Federal and state tax returns, and
Driver's license or car registration.

The home is near:

Where you work,
Where you bank,
The residence of one or more family members, and
Recreational clubs or religious organizations of which you are a member.

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A

AmeliesUncle

You can make it your Principal Residence and likely qualify for an exclusion. However, because it was not always your main home, the exclusion will be prorated. So you won't be able to exclude all of the gain; part of it will be taxable.

H

hindman203Author

Hi AmeliesUncle,

Thanks for the post. Can you elaborate more? Where does the prorated piece apply? In looking at pub. 523, and living 2 years of the past 5 in the home as a primary residence, the worksheet results concluded that a $500,000 exclusion was inline with our case. What am I missing? Is there another form?

Thanks in advance.

A

AmeliesUncle

When the IRS revised Publication 523 a number of years ago, they messed up the explanation it so it is difficult to understand using the current Publication. But TurboTax will walk you through it (but read the screen very carefully).

It is more complicated than this, but here is a simplified explanation: Let's say you own the home for 10 years, the first 6 years was NOT your Principal Residence, then the last 4 years it WAS your Principal Residence. In that scenario, only 4/10ths of your profit is eligible for the tax-free exclusion. The other 6/10ths would not qualify. But it is a bit more complicated than that

Another thing to consider: In my example above, that home was your Principal Residence for 4 years. That means your US Residence was NOT your Principal Residence for those 4 years, and that will need to be factored in if/when you eventually sell the US Residence.

As I said, the current Publication 523 makes it unclear, but here is a link to an older version that is easier to understand. Look at "Nonqualified Use" on page 15.

https://www.irs.gov/pub/irs-prior/p523--2012.pdf#page=15