Capital Gains Exclusion on the Sale of a Principal Residence — Including Property Located Abroad
- Juliana Zenti
- Jul 7, 2025
- 3 min read
The U.S. tax code offers a significant benefit for individuals who sell their principal residence: the exclusion of capital gains up to certain limits. This benefit also applies to the sale of real estate located outside the United States, provided that specific legal requirements are met.
What Is Capital Gain?
Capital gain refers to the profit realized from selling an asset for more than its purchase price. In the United States, the sale of assets such as real estate is subject to taxation on the gain, except when certain legal exclusions apply.
Capital Gain Exclusion on the Sale of a Principal Residence
Under Internal Revenue Code (IRC) Section 121, a taxpayer may exclude up to:
$250,000 of capital gain if filing as a single individual;
$500,000 of capital gain if married filing jointly.
This exclusion can be applied to each qualifying sale, provided that the taxpayer meets specific criteria, known as the “ownership and use tests.”
Requirements for the Exclusion
Ownership Test: The taxpayer must have owned the property for at least 2 of the last 5 years prior to the sale.
Use Test: The property must have been used as the taxpayer’s principal residence for at least 2 of the last 5 yearsprior to the sale.
Frequency Limitation: This exclusion may only be applied once every two years.
What If the Property Is Located Outside the U.S.?
The good news is that U.S. tax law allows this exclusion to apply to the sale of property located abroad, as long as the taxpayer is a U.S. tax resident and the property sold qualifies as their principal residence.
In other words, if a U.S. citizen or tax resident sells their primary residence in Brazil (or in any other country), they may benefit from the capital gain exclusion under IRC Section 121, provided the same ownership and use requirements are met.
This interpretation has been confirmed by the IRS in various publications, including IRS Publication 523: Selling Your Home, which explicitly states that the exclusion may apply to homes located outside the United States.
Recommended Documentation
To take advantage of this benefit when selling a foreign residence, taxpayers should maintain thorough documentation to substantiate:
Legal ownership of the property (title deeds, property records);
Personal use of the property as a principal residence (utility bills, bank records, official residency documentation, local declarations);
Dates of acquisition and sale;
Cost basis and improvements (for accurate calculation of capital gain).
Additionally, even if the gain is fully excluded, the sale must still be reported on the U.S. individual income tax return (Form 1040) using Form 8949 and Schedule D, clearly indicating that the Section 121 exclusion was applied.
Legal Basis
The capital gain exclusion on the sale of a principal residence is outlined in Internal Revenue Code – Section 121. Further guidance is available on the IRS website, particularly through the following references:
IRS Publication 523 – Selling Your Home
IRC §121 – Exclusion of Gain from Sale of Principal Residence
