If your main home wasn’t in the United States for more than half the year, several tax implications and considerations arise based on the provided information.
- Principal Residence Exclusion:
- To qualify for the exclusion of gain from the sale of your main home, the home must be your principal residence. According to the IRS guidelines, an individual can only have one main home at a time, and the determination of which home is your main home is based on a "facts and circumstances" test. Factors include where you spend the most time, the address listed on your official documents (e.g., U.S. Postal Service address, voter registration card, federal and state tax returns, driver’s license or car registration), and proximity to your work, banking, family members, and recreational clubs or religious organizations.
- If your main home was not in the United States for more than half the year, you would need to consider whether it still qualifies as your principal residence under these factors.
- Foreign Earned Income Exclusion:
- If you are a U.S. citizen or resident alien living abroad, you may be eligible for the foreign earned income exclusion. To qualify, you must have a tax home in a foreign country and meet either the Physical Presence Test or the Bona Fide Residence Test.
- The Physical Presence Test requires you to be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
- The Bona Fide Residence Test requires you to be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. This test is based on your intentions and the nature of your stay in the foreign country.
- Tax Home Considerations:
- Your tax home is generally the area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. If your main home is not in the United States for more than half the year, your tax home might be considered to be in the foreign country where you are working or residing.
- If your tax home is in a foreign country, you may be eligible for certain exclusions and deductions related to foreign earned income and housing.
- Expatriation and Tax Residency:
- If you are considering expatriation or have expatriated, you must be aware of the tax consequences. U.S. citizens are taxed on their worldwide income, and expatriation involves renouncing U.S. citizenship and potentially being subject to specific tax rules under sections 877 and 877A.
- If you are a U.S. resident under the substantial presence test, you may still be subject to U.S. taxes unless you meet certain criteria, such as having a tax home in a foreign country and a closer connection to that foreign country than to the United States.
In summary, if your main home wasn’t in the United States for more than half the year, you need to evaluate whether it still qualifies as your principal residence for the exclusion of gain from its sale. Additionally, you may be eligible for the foreign earned income exclusion if you meet the necessary tests and have a tax home in a foreign country. Understanding your tax residency status and the implications of expatriation is also crucial.
Sources:
Publication 523 (2023)
§ 121. Exclusion of gain from sale of principal residence
Publication 593
Leaving on a Jet Plane: The U.S. Tax Consequences of Expatriation
Publication 54 (2023)
