For Americans living in the UK, selling a primary residence can trigger a surprising number of tax consequences in both countries. While UK tax law offers certain reliefs, the US has its own complex rules, and doesn’t always respect the UK treatment. This article breaks down the key points you need to know before selling your home.
US Taxation of a Principal Residence
Under IRC Section 121, American taxpayers can exclude up to $250,000 of capital gain from the sale of their principal residence (or $500,000 if married filing jointly), provided certain conditions are met:
You must have owned the home for at least two years in the five-year period before the sale. You must have used the home as your primary residence for at least two of those five years.
If you meet both tests, you may qualify for the exclusion. Any gain above the exclusion threshold is generally taxed at long-term capital gains rates, typically 0%, 15%, or 20%, depending on your income level.
Important: The exclusion does not apply to non-qualified use periods (such as time spent renting the property after moving out).
UK Taxation of a Principal Residence
In the UK, the equivalent relief is known as Private Residence Relief (PRR). If the property has always been your main residence, PRR may fully exempt the gain from UK Capital Gains Tax (CGT). If you rented out the home at any point, Lettings Relief (now significantly limited) may apply.
Also, the UK generally applies a rebasing rule: only gains accruing after you became UK tax resident are taxed.
Timing Mismatches and Currency Gains
The main complications arise in areas where the two systems do not align:
The US does not offer full relief on currency gains. If your UK home appreciated due to changes in exchange rates (e.g., bought in pounds, sold for pounds, but USD equivalent has increased), the US taxes that gain. The UK may not tax the gain at all if PRR applies, so no foreign tax credit is available to offset your US liability.
This can result in double taxation unless planned carefully.
Foreign Tax Credit Limitations
Even if you do pay UK CGT, the foreign tax credit (FTC) on your US return may be limited by:
The portion of the gain the US doesn’t recognise (e.g., due to non-qualified use or currency adjustments) Timing differences if the sale falls in different tax years in each country
Planning Tips
Document ownership and use periods clearly for Section 121 eligibility. If moving out before sale, consult a tax advisor about potential non-qualified use rules. Consider timing the sale to maximise both Section 121 and PRR. Be mindful of exchange rates and track basis in both currencies. Consult with a cross-border tax professional to model out both tax liabilities in advance.
Final Thoughts
The sale of a primary residence is one of the most overlooked tax planning opportunities for Americans living in the UK. While it may be tax-free under UK law, the IRS may still come knocking. By understanding the rules on both sides and taking proactive steps, you can avoid unnecessary tax surprises.
The information in this blog post is for general informational purposes only and does not constitute professional tax advice. We strongly recommend consulting a qualified tax professional before making any decisions. US Expat Tax Advisor is not liable for any actions taken based on this content.
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