We received a great question this week about whether someone who has moved to France and subsequently sells their home in the U.S. will pay capital gains taxes in France.

This comes up for a lot of people moving from the U.S., and I was surprised to realize that we had not done an article on the topic before. So, here it is.

What are capital gains taxes?

First an explanation:  “capital gains” are the profits you receive on an investment from its growth in value over time. Correspondingly,  “capital loss” is when the opposite happens and your investment loses money. You calculate gain on any sort of asset by subtracting the total amount you invested in the asset from the amount you get at its sale (see example below).

In the U.S., people generally pay a capital gains rate of 0%, 15% or 20%, depending on their overall income level. If you owned your asset for less than a year (“short-term gains”), you will pay more --  anywhere from 10% to 37%, depending on your income level.

In France, people generally pay 19% for tax on capital gains and an additional charge of 17.2% for a total tax of 36.2%.

But there are exceptions in both countries. And if you are a U.S. citizen living in France at the time of the sale (even if you are also a French citizen), you will not pay both taxes fully. Instead, you will calculate each country’s tax separately and then subtract the taxes you paid to the U.S.  from what you would have owed France. So, how do you calculate the calculate taxes for each country?

The U.S. calculation and the home exclusion

The U.S. has a “principal residence exclusion” that allows you a substantial break on capital gains taxes when you sell your primary home in the U.S.

If you have lived in a home (and it has been your “principal residence”) for at least two out of the five years before you sold, you qualify for this break. The two years do not have to be consecutive, and you might still qualify without them if the relocation is the result of certain urgent situations. If you do qualify, you can exclude up to $250,000 per individual (so, $500,000 for a couple) from the gain on your property. For more details on the exemptions for eligibility, check the IRS page (especially the links to the left).

By way of example, let’s say that Thomas and Sylvaine bought a U.S. property for $460,000 ten years ago, made no improvements to the property, and have just sold it for $1,000,000. The capital gain on that property (the difference between what they paid and what they get at sale) is $540,000. Because they each get an exclusion of $250,000, they can exclude $500,000 from that gain. They will pay long-term capital gains tax on the remaining $40,000 only.

If, on the other hand, Thomas and Sylvaine had rented out their property for 3 ½ years while living in France, they could no longer be eligible for the exclusion unless they met one of the other exceptions. So, in the U.S., they would pay a long-term capital gains tax on the full $540,000 gain.

The French calculation: the primary home exclusion in France

France also has an exclusion for primary homes, but it works a little differently. In France, the capital gain on your principal residence (“résidence principal”) is totally excluded from taxes, so you don’t need to worry about a cap. But you do need to worry about the timing.

In contrast to the U.S. “two of five years rule”, the French capital gains exclusion says that the property must be your primary residence at the time of sale. There is a specific provision that lets you keep that primary residence status in case of divorce or separation as long as either you or your partner are living there.

From a logistics standpoint, the French authorities recognize that home sales can take time. If you have put your house on the market before moving to France, you can still use the primary home exclusion even if you don’t find a buyer until a year later. But, if you rent out your property after leaving the premises, you immediately end the property’s status as a principal residence.

The other French exclusions

You probably will have already noted that Thomas and Sylvaine could create a big tax bill for themselves in France if they decided to keep their U.S. home for a while after moving to France. This actually comes up a lot as households wonder whether the move to France will be permanent, if they might want to leave the property to a family member, or if they think renting it out might provide a good source of income (note: rental income taxation rules are different under the Treaty).

If Thomas and Sylvaine did rent out their primary U.S. home after moving to France, and they then go on to sell it, the couple’s property will no longer qualify for the French capital gains exclusion on primary homes. BUT they might qualify for a different exclusion under French tax law.

For instance, imagine Thomas and Sylvaine rented a home in France for more than 4 years, and then sell the U.S. home. They could now claim an exclusion from French capital gains tax if they use the proceeds to buy their first French residence – as long as they buy within two years of selling the U.S. property.

But let’s say they did not follow that path either. French capital gains tax on general property sales is calculated according to how long the seller owned the property. And we will use the same calculation on a U.S. property just as if it was located in France.

Once a property is held more than six years, the seller starts getting increasingly large breaks on both capital gains tax and social charges under the French system. In fact, if the couple in our example owned their U.S. property for 22 years before selling, they are likely exempt from capital gains taxes even if it was no longer eligible as a primary home. If they owned for at least 30 years, the social charges go away, as well.

There are several other French exclusions for buyers or sellers in certain specific situations that might fit your situation. You can find out more (in English) at the French Public Services website.

How does the international calculation work?

Now that we have calculated the taxes that would be owed in each country, we will apply Article 13 of the U.S. – France Tax Treaty. That gives the U.S. the first right to tax the gains on a U.S.-based property and then allows France to impose its tax minus the U.S. tax paid.

In our first example above, in which Thomas and Sylvaine put their home on the market at the time they moved out, the couple will pay U.S. capital gains tax on the $40,000 they received after the U.S. exclusion. They would owe no tax in France even though they were French tax residents at the time of sale because it was a primary home. If, on the other hand, they had missed the eligibility for a principal residence and other exclusions in France, they would calculate their French taxes based on duration of ownership. If, to pick a random number, they calculated total French taxes and social charges due of $65,000, they would subtract the $40,000 already paid to the U.S. to get a final French bill of $25,000.

Note: Like most countries on earth, France only collects a tax on foreign income only if it is received during the time you are a resident there. So, if Thomas and Sylvaine close on the sale of their home before the date of their arrival in France (i.e. they were not French tax residents on the date of sale), they will report the income on their first French tax Déclaration but will owe not taxes to France on that income.

An important reporting issue!

It is common in the U.S. for people to pocket the proceeds from the sale of a property and to work things out with the IRS at the end of the year when you file your tax return. The French system works differently. Here in France, you file a cerfa form 2048-IMM-SDS within a month of the sale and pay your capital gains tax at that time.

If you were selling a French property, your notaire would take care of this process. But those of us with U.S. property sales will be doing the calculations on the cerfa form ourselves and then using the box that allows us to take a credit for the U.S. capital gains tax we paid against whatever French tax and social charges would have been owed.

So when should you sell?

Obviously, the decision to sell your primary home involves a lot more than tax calculations. But if you are thinking of selling, consider the following list of questions:

1.        Are the gains on your home significant enough to worry about?

2.        Do you qualify for the U.S. primary home exclusion?

3.        If not, or if your capital gain is significant, do you have a year in which your income (and therefor U.S. capital gains tax bracket) is lower?

4.         Do you qualify for the French primary home exclusion?

5.        If not, could hold your property longer without losing your U.S. principal residence exclusion?

6.        Could you instead rent your current home in France for at least 4 years and use the proceeds to buy in order to qualify for next purchase French exclusion?

And of course, don’t hesitate to call us for planning help. It’s all part of the much bigger puzzle of your life as an expat.