US Tax Return Preparation for Expats: Selling a US Rental

A US citizen living in London who sells a US rental property files the sale twice. The IRS taxes the dollar gain first, including a 25% slice for past depreciation, NIIT and state tax. HMRC then taxes a separately computed sterling gain at 18% or 24% and credits the US tax against it, often reducing UK tax to nil.

That is the short answer. The detail is where the money and the risk sit. Getting US tax return preparation for expats right in the year of sale means producing two computations that will never agree with each other, because the two systems measure different gains in different currencies over different tax years. At Jungle Tax we prepare both returns for American owners in London, and this guide sets out exactly how each one is built, what typically goes wrong, and what the finished filings look like, using a worked example in dollars and sterling.

The scope here is deliberately specific: a US citizen who is UK resident, selling US investment real estate they have let out. It is not about FIRPTA withholding, which applies to foreign (non-US) sellers, and it does not cover deferral under section 1031, which in practice rarely suits an owner who is not reinvesting in US property.

Why does one sale produce two different gains?

The US and UK start from different questions. The IRS asks how many dollars you made on an asset whose cost you have been writing off against rental income for years. HMRC asks how many pounds you made on an asset you bought and sold in a foreign currency, and it has never allowed you a deduction for that write-off in the first place.

• Depreciation. The US reduces your basis by every dollar of depreciation allowed or allowable, then taxes that portion of the gain at up to 25%. The UK has no capital allowances on a let dwelling and no recapture concept, so your sterling base cost is your original cost plus qualifying improvements, untouched.
• Currency. The US gain is measured in dollars. The UK gain is measured by converting the cost at the exchange rate on the acquisition date and the proceeds at the rate on the disposal date. Currency movement alone can create, inflate or erase a UK gain.
• Tax year. The US year is the calendar year. The UK year runs 6 April to 5 April, so a sale in June 2026 falls in the US 2026 return and the UK 2026/27 return, with filing deadlines more than nine months apart.
• Losses. Suspended US passive losses are released on the sale and reduce US income. UK rental losses carried forward can only be set against future UK property business profits, not against a capital gain.

How does the IRS tax the sale of a US rental property?

For a property held longer than one year, the sale is reported on Form 4797 as a section 1231 disposal, with the gain flowing to Schedule D. The total gain is the amount realised (sale price less selling costs) minus your adjusted basis (cost plus improvements, less accumulated depreciation). That single dollar gain is then split into layers that are taxed differently.

The unrecaptured section 1250 slice at 25%

Residential rental buildings are depreciated on a straight-line basis over 27.5 years. Because the method is straight-line, there is no ordinary-income recapture under section 1250 itself; instead, the portion of the gain equal to the depreciation taken is "unrecaptured section 1250 gain", taxed at a maximum federal rate of 25%. The balance of the gain is ordinary long-term capital gain, taxed at 0%, 15% or 20% depending on taxable income. For the clients we act for, the realistic assumption is that most or all of it sits in the 20% band once the gain is stacked on top of other income.

Two points routinely surprise owners. First, the basis reduction applies to depreciation allowable, not just depreciation actually claimed. An owner who never depreciated the property while abroad still has the 25% slice computed as if they had, without ever having had the deduction. Where that has happened, a change of accounting method on Form 3115 in the year of sale, or before it, can recover the missed depreciation in one adjustment; our guide to catching up missed depreciation with Form 3115 explains the mechanics. Second, there is no main-residence exclusion here: section 121 applies to a home you have owned and used as your principal residence, not to an investment property you have let throughout.

Suspended passive losses released on Form 8582

Most US rental properties owned from London have produced tax losses at some point, especially in the early years when depreciation and mortgage interest outrun rent. A US citizen living abroad with a UK salary is rarely able to use those losses currently: the $25,000 special allowance for active participation phases out completely once modified adjusted gross income reaches $150,000. The losses are therefore suspended on Form 8582 and carried forward, year after year.

Section 469(g) releases them when you dispose of your entire interest in the activity in a fully taxable transaction to an unrelated party. An arm's-length sale on the open market qualifies; a sale to a relative or to an entity you control does not. On release, the losses are treated as non-passive and offset income in a set order: first the gain from the activity itself, then other passive income, then any other income. For the full history of how these losses build up, see our guide to Form 8582 passive losses for expats.

The cross-border nuance few pages mention: if the losses were never tracked, because earlier returns omitted the property or were prepared without Form 8582, the carryforward has to be reconstructed year by year before it can be claimed. An unsupported figure on the sale-year return is an easy adjustment for an examiner to disallow.

The 3.8% Net Investment Income Tax

The gain on a rental property is net investment income, and the 3.8% Net Investment Income Tax applies to the lesser of net investment income and the excess of modified adjusted gross income over $200,000 (single), $250,000 (married filing jointly) or $125,000 (married filing separately). These thresholds are not indexed for inflation. The married-filing-separately figure matters more than people expect: a US citizen married to a non-US spouse often files separately, and reaches the threshold at half the joint figure.

Released passive losses that are properly allocable to the rental activity reduce net investment income on Form 8960. Under the current US position, foreign tax credits cannot be used against NIIT, which is one reason a US citizen in London cannot shelter this charge with UK tax already paid on other income.

The state return, with no treaty relief

The property's state taxes the gain as income sourced to that state, whatever your residence. The US-UK income tax treaty binds the federal government, not the states, so nothing in it reduces state tax. Many states follow the federal treatment of depreciation, but their rates generally do not distinguish the 25% slice from the rest of the gain, and the state's own passive loss carryforward may differ from the federal one where the state decoupled from federal depreciation rules. Several states also require withholding at closing from nonresident sellers, which is then credited on the nonresident return. If you have not filed in that state since moving to London, the sale year usually exposes it: our guide to the nonresident state tax return for a US rental property covers the annual obligation and the prior-year catch-up.

Federally, state income tax paid is an itemised deduction subject to the SALT cap, not a credit, and for high earners the cap is small relative to the tax on a large gain. In practice the state tax is a real, largely unrelieved cost on the US side; the question is whether the UK will credit it.

How does HMRC compute the UK gain?

As a UK resident, you are chargeable to capital gains tax on worldwide disposals. The UK computation is entirely separate from the US one and is carried out in sterling throughout. HMRC's guidance in CG78310 requires each element of the computation to be converted at the rate prevailing on its own date: the purchase price at the acquisition-date rate, each improvement at the rate on the date it was paid, and the proceeds and selling costs at the disposal-date rate. Converting a dollar gain into sterling at the end is not an acceptable method.

• Base cost: the original dollar price plus purchase costs, converted at the acquisition-date rate, plus capital improvements at their own rates. No reduction for US depreciation.
• Proceeds: the sale price less selling commissions and legal fees, converted at the disposal-date rate.
• Annual exempt amount: £3,000 for 2026/27.
• Rate: 18% to the extent the gain falls within any unused basic rate band, and 24% above it. These have applied to residential and non-residential gains alike since 30 October 2024.
• Mortgage: the outstanding loan is irrelevant to the gain, but a dollar mortgage repaid on sale can produce a separate foreign-currency debt gain or loss in the UK, which is not chargeable for individuals under current rules. It is worth noting on the working papers rather than ignoring.

Is a UK 60-day return required?

No. The 60-day capital gains tax on property return applies to UK residents disposing of UK residential property, and to non-residents disposing of UK land. A UK resident selling a property located in the United States reports the gain on the capital gains pages of the Self Assessment return for the tax year of sale, and claims foreign tax credit relief on the foreign pages. For a disposal in 2026/27, the return and any tax are due by 31 January 2028.

Recent arrivals: the four-year foreign income and gains regime

One UK-side relief is easy to miss. Since 6 April 2025, an individual who becomes UK resident after at least ten consecutive tax years of non-residence can claim relief on foreign income and gains for their first four tax years of residence. A US citizen who moved to London recently and sells within that window may be able to exclude the US gain from UK tax altogether, at the cost of losing the personal allowance and annual exempt amount for that year. The claim is made on the return, so it must be considered before the UK filing is finalised.

Who gets to tax the gain first?

Under Article 13 of the US-UK treaty, gains from real property may be taxed by the country where the property sits. The United States, as the situs country and the country of citizenship, therefore has the primary taxing right on a US rental property. The UK, as the country of residence, taxes the gain as well and relieves the double charge by giving credit for the US tax, under the treaty and HMRC's guidance in CG14380.

The direction matters. The US does not give credit for UK capital gains tax on this sale, because the gain is US-source and there is no foreign tax on foreign-source income to credit. A Form 1116 is still likely to be on the US return for your UK salary or UK investment income, but it plays no part in relieving the property gain.

The UK credit is the lower of the US tax attributable to the gain and the UK tax on the same gain. Any excess US tax is simply lost: there is no UK carryforward of unused foreign tax credit against capital gains. If the UK tax is higher, the difference is payable to HMRC.

The state tax credit question

Federal tax is plainly creditable. State income tax is less settled in practice. The treaty's covered taxes are federal, but HMRC has historically allowed unilateral relief for US state income taxes, and in our experience it is generally given where the state tax is an income tax charged on the same gain. Local taxes that are not income taxes, such as transfer taxes paid at closing, are not creditable but are generally deductible as a selling cost in the UK computation. The NIIT is treated inconsistently in practice; where it is included in the credit claim, the computation should show it separately so the position is visible. Because the credit is capped at the UK tax in most US-rental sales, whether the state tax and NIIT are counted often makes no difference to the bottom line; where it does, it is usually a sale with a large currency gain, and the treatment needs to be settled before filing.

US and UK treatment compared

Element	US return (Form 1040)	UK return (Self Assessment)
Currency	US dollars	Sterling, each figure at its own date's rate
Tax year of a June 2026 sale	2026 calendar year	2026/27 (6 April 2026 to 5 April 2027)
Depreciation	Reduces basis; taxed back at up to 25%	Never deducted; no recapture
Main rate on the gain	15% or 20% long-term capital gain	18% or 24%
Additional charges	3.8% NIIT; state income tax	None
Rental losses carried forward	Suspended passive losses released in full	Property losses cannot reduce the gain
Annual allowance	None for this gain	£3,000 annual exempt amount
Double tax relief	None given; US has primary right	Credit for US tax, capped at UK tax
Forms	4797, Schedule D, 8582, 8960, Schedule E, state nonresident return	Capital gains pages (SA108), foreign pages (SA106)
Filing deadline	15 April 2027, automatic extension to 15 June 2027 for filers abroad (tax due 15 April)	31 January 2028

Worked example: both returns in the year of sale

Consider a US citizen, single, living in London for twelve years and a UK additional-rate taxpayer. In August 2014 she bought a rental condominium in the United States for $500,000 including purchase costs, of which $100,000 is allocated to land. The dollar was trading at about $1.68 to the pound. She let the property throughout and depreciated the $400,000 building on her US returns, accumulating $165,000 of depreciation by the date of sale. Her Form 8582 shows $48,000 of suspended passive losses from the early years. She sells in June 2026 to an unrelated buyer for $900,000, with $54,000 of selling costs, at an exchange rate of $1.33.

The US return (calendar year 2026)

Line	Amount (USD)
Amount realised ($900,000 less $54,000)	$846,000
Adjusted basis ($500,000 less $165,000)	$335,000
Total gain on Form 4797	$511,000
Of which unrecaptured section 1250 gain at 25%	$165,000 → $41,250
Of which long-term capital gain at 20%	$346,000 → $69,200
Suspended passive losses released (Form 8582)	($48,000), non-passive deduction
NIIT at 3.8% on $463,000	$17,594
Federal tax attributable to the sale (illustrative)	$128,044
State tax at an illustrative 6% on $463,000	$27,780
Total US tax on the sale	$155,824

For simplicity, the example applies the top rates to the whole gain, which is realistic once a London executive's salary is included in taxable income. The released $48,000 offsets the gain from the activity and reduces the NIIT base; its regular-tax effect depends on how the rest of the return is built, and in a return already using foreign tax credits for UK salary it may also change the Form 1116 limitation and carryforward. That interaction is worth modelling line by line, not assuming.

The UK return (tax year 2026/27)

Line	USD	Rate	GBP
Proceeds	$900,000	1.33	£676,692
Less selling costs	$54,000	1.33	(£40,602)
Less base cost, no depreciation adjustment	$500,000	1.68	(£297,619)
Chargeable gain			£338,471
Less annual exempt amount			(£3,000)
Taxable gain at 24%			£335,471 → £80,513
US tax available for credit ($155,824 at about 1.33)			£117,161
Credit allowed: lower of UK and US tax			(£80,513)
UK capital gains tax payable			£0

What the example shows

Three things stand out. First, the economic dollar gain before depreciation was $346,000, worth about £260,000 at the sale-date rate, yet the UK chargeable gain is £338,471. Roughly £78,000 of the UK gain is created purely by the pound weakening against the dollar between 2014 and 2026. Second, even though the UK gain is inflated by currency, the US tax is higher still, because of the 25% slice, the NIIT and the state tax. The credit is capped at £80,513 and about £36,600 of US tax goes unrelieved in the UK. Third, the UK tax is nil but the UK return is not optional: the gain, the credit claim and the exchange rates used all have to be reported, and an omitted foreign gain is one of the most common errors HMRC's international data exchange picks up.

Change the facts and the result changes. If the state has no income tax and the property was bought when sterling was weaker, the US tax can fall below the UK tax, leaving a UK balance to pay. If the dollar strengthened sharply, the UK can show a gain on a property that made a dollar loss, with no US tax to credit. If sterling strengthened, the UK can show a capital loss on a property that produced a large US gain. Each of these is a filing outcome, not a choice, and each needs to be computed rather than assumed.

What the two filings look like in the year of sale

US package for 2026

• Form 1040 with Schedule D and the unrecaptured section 1250 gain worksheet.
• Form 4797, Part I, reporting the section 1231 disposal.
• Schedule E showing the final part-year rental results and the property marked as disposed of.
• Form 8582 releasing the suspended losses for the activity.
• Form 8960 for the Net Investment Income Tax.
• Form 1116 for UK salary and investment income, as in prior years.
• The state nonresident return reporting the gain, with any closing withholding claimed.
• FinCEN Form 114 and, where thresholds are met, Form 8938 if the proceeds land in UK accounts, which is easy to forget when a large balance arrives late in the year.

UK package for 2026/27

• SA100 main return.
• SA108 capital gains pages, with a computation attached showing each figure converted at its own date's rate.
• SA106 foreign pages, claiming foreign tax credit relief for the US federal and, where included, state tax on the gain.
• SA106 foreign property income for the final months of rent, converted to sterling.
• Evidence of the US tax actually paid, since the credit is for tax finally due and paid, not tax estimated.

Timing is the practical trap. The UK return is due on 31 January 2028, but the US return for 2026 is normally filed in 2027. If the US figures change on amendment, for example because the state audits the nonresident return, the UK credit claim must be revised to match. HMRC's helpsheet on foreign tax credit relief and capital gains sets out the working approach, now consolidated into the general foreign tax helpsheet.

What if earlier years were never filed?

A sale is often the moment an owner discovers the property was never properly reported: no Schedule E, no depreciation, no state returns, no FBARs on the UK accounts. The sale-year return cannot be correct if the history behind it is missing, because the basis, the suspended losses and the depreciation all depend on prior years. Where the omissions were non-wilful, the IRS Streamlined Foreign Offshore Procedures allow three years of amended or late returns and six years of FBARs to be filed without the usual penalties, and the sale year can be prepared on the corrected base. Our streamlined filing team handles the catch-up and the sale-year returns as one engagement. On the UK side, unreported rental income or foreign gains from earlier years are brought up to date through HMRC's disclosure routes rather than simply added to the next return.

Common errors we correct

• Converting the dollar gain into sterling at one rate, instead of converting cost and proceeds at their own dates.
• Deducting US depreciation from the UK base cost, which understates the UK gain and the available credit cap.
• Claiming UK credit for the full US tax without capping it at the UK tax on the same gain.
• Filing a UK 60-day return for a US property, then omitting the gain from Self Assessment.
• Releasing passive losses that were never tracked or supported in prior returns.
• Forgetting the state return because the property manager stopped issuing state forms.
• Missing the four-year foreign income and gains claim for a recent arrival.

For a broader view of how the US and UK systems interact on property and investment income, see our overview of US-UK tax accountants and our high net worth service, which brings the US, state and UK filings together under one team.

Bringing the year of sale to a clean close

Selling a US rental property from London is not a single transaction for tax purposes but two, measured in different currencies, over different years, under rules that disagree on what the gain even is. The US side carries the heavier tax and the more forms; the UK side carries the currency computation and the credit claim, and is no less mandatory for showing nil tax. Prepared together, from a verified basis and loss history, the two returns reconcile cleanly and stand up to scrutiny from both authorities.

If you have sold, or are about to sell, a US property while living in the UK, contact our cross-border team for a confidential consultation. We will review your basis, depreciation and passive loss history, prepare the federal, state and UK returns for the year of sale, and bring any missed earlier years into compliance alongside them.