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How does the US tax system treat Capital Gains from selling rental property in Qatar?

When US dual nationals or green card holders sell a rental property in Qatar, the profit realized from the sale may be subject to US capital gains tax. This includes recapturing any depreciation claimed on the property during the period it was rented out, which many might not be aware of.

Depreciation recapture can significantly impact the tax owed, as it adjusts the property’s cost basis downward, increasing the taxable gain.

If a mortgage or home loan was used to purchase the property and was repaid or settled when the property was sold, the loan agreement needs to be reviewed for phantom gains.

Can the Foreign Earned Income Exclusion (FEIE) apply to capital gains?

No, the Foreign Earned Income Exclusion (FEIE) applies only to earned income, such as wages or self-employment income. Capital gains, being investment income, do not qualify for the FEIE, meaning that profits from the sale of a rental property abroad are taxable in the US without the benefit of this exclusion.

What if my property in Qatar was a principal residence, not a rental?

The tax treatment is more favorable for the sale of a principal residence. If you lived in your property in Qatar for at least two out of the five years preceding the sale, you can exclude up to US$250,000 of the gain from your taxable income if filing as single or married filing separately, and up to US$500,000 if filing jointly. This significant exclusion can reduce or even eliminate the capital gains tax owed on the sale of a principal residence.

Are home improvement and sale-related expenses in Qatar deductible?

Yes, expenses related to home improvement and the sale of the property, such as real estate agent commissions and certain closing costs, can be added to the property’s cost basis. This effectively reduces the capital gain or increases the loss on the sale, potentially lowering the capital gains tax owed.

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