Moving Abroad? Don’t Let Capital Gains Follow You!
Thinking about skipping the country and living in a foreign paradise? While it may sound like a dream come true to move to a tropical country, or hey, even a northern one, planning is key. More specifically, tax planning.
You Still Have to Pay Taxes, Sorry!
Moving out of the country doesn’t mean Uncle Sam is in the rearview mirror...not completely. If you’re selling or renting out your home while you live abroad, the IRS still wants its share. Fortunately, if you plan ahead, you can mitigate many of the potential tax hurdles you may run into.
Selling Your Primary Residence: Do You Qualify for an Exclusion?
The IRS offers a §121 tax exclusion if you meet certain requirements when you sell your home. This can mean you’re able to exclude up to $250k (single) or $500k (couples filing jointly) of gain from the sale of a primary residence.
You must have owned and lived in the house for at least two of the previous five years in order to qualify for the exclusion. However, there are some exceptions, so you need to read the fine print. Better yet, get an expert to check things out and give you advice on how to proceed.
Selling a Rental Property: How to Save On Taxes
When you sell a rental property, you can run into some serious issues. The two biggest are capital gains taxes and depreciation recapture. Fortunately, you have options to help manage your taxes.
1031 Exchange: You may defer capital gains if you use the proceeds to buy a “like-kind” rental property in the U.S. Obviously, this may not be ideal if you’re trying to cut ties with the U.S. and is only for investment properties.
Harvesting Stock Losses: This option involves selling off losing investments so you can offset any property sale gains. You’ll need to plan ahead, though, because you have to sell the house and investments in the same year.
Cost Segregation Study: You may be able to generate losses with cost segregation that will offset the gain and reduce how much you owe in taxes. I personally like to use it if you sell another rental or if you have income from another passive asset.
In short, there are ways to keep more money in your pocket so you can live the good life in another country, but you have to know what to do before listing the property.
Why You Need a Tax Pro On Your Side
The above strategies only work if you plan ahead and make sure everything is in order. You need to account for all the factors, like state taxes, filing deadlines, and foreign reporting requirements, which can get very complicated. Before you can set up a good strategy, you’ll need the total income for the year.
When it comes to figuring out some strategies, like cost segregation and 1031 exchanges, it’s best to find a trusted tax expert. They’ll ensure you don’t make costly mistakes and that you’ll get everything set up before you sell your home.
Thinking about selling your home and leaving the country? You’re not alone, but be sure to book a tax strategy session with Ask Anna Tax before you list your house. You’ll save yourself a lot of hassle and money.
