Capital gain exclusion applies to foreign home

Dear Tax Talk,
I am a U.S. citizen married to an Italian woman. We purchased our home for 350,000 euro here in Rome and have lived in it for six years. We may move back to the U.S. If we sell this property for 600,000 euros, we will have a capital gain of 250,000 euros. Will we be exempt from paying the taxes? Can we file our taxes jointly even though my wife is Italian with a green card? What is the bottom line? Does it depend also on state laws as well? Are there any other surprises to look out for? Thanks.
— Duane

Dear Duane,
When they sell their main home, unmarried taxpayers can exclude up to $250,000 in gain; married taxpayers, $500,000. U.S. citizens pay tax on their worldwide income and capital gains. The capital gains exclusion applies to a home located in the states or abroad. Your simple question has many issues such as marital status, residency and computing gain.

As a green card holder, your wife is considered a U.S. taxpayer and would be required to file a U.S. tax return. Since you’re married, you would most likely file a joint tax return with her and qualify for the higher exclusion. You would qualify for the higher exclusion if you both have lived in the house for more than two years and either one of you or both have owned the home for two years prior to its sale.

Your wife’s green card status may be adversely affected by claiming residency (i.e., her main home) in a foreign country. You should consult with an immigration attorney on this issue. From a tax standpoint, the higher exclusion is a benefit.

You need to figure your U.S. dollar cost in the home at the time you purchased it, at the time you made any improvements and at the time you sell it using the prevailing exchange rate. For example, six years ago one euro was worth about $1.20, so the home’s cost was $420,000. Today the euro is about $1.30, so if the home is sold for 600,000 euros, the U.S. equivalent is $780,000. The capital gain therefore would be $360,000 — well below the married couple exclusion. Although part of the gain relates to the strengthening of the euro, the whole gain is considered as part of the sale of the home and thus eligible for exclusion.

Since you are not a resident in the U.S., you should not have a state income tax issue.

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