Dear Tax Talk,
What would the tax implication be on the sale of a property in London of a nonresident versus a resident alien living in the U.S.? My fiance plans on selling his London property, which is currently being rented out, in the next three years. Within that time he can either extend his visa or obtain a green card through his employer. If the gain on the property is less than U.S. $150,000, would the tax implications be significant one way or the other?
— Melissa

Dear Melissa,
If your fiance is living in the U.S., his immigration status for tax purposes is the same as a resident or citizen, regardless of whether he is here on a visa, green card or illegally. If he doesn’t live in the U.S. and he doesn’t have a green card, then there are obviously no tax implications as he is a foreigner for tax purposes.

When a person immigrates to the U.S., they run into a tax trap on appreciated assets. For tax purposes, any pre-immigration gain is taxable in the U.S. upon a later sale while a U.S. resident. In other words, the same rules apply to determine gain or loss as if the person had been a resident all along. The cost basis of the property is the amount paid when originally purchased, converted into U.S. dollars at the prevailing exchange rate. The value at the time the person immigrates does not change the original cost.

If the property was your fiance’s home which he owned and lived in for two of the last five years preceding its sale, he can claim the exclusion on the sale of a principal residence. The capital gains exclusion allows an individual to exclude up to $250,000 in gain from the sale of a main home, which is more than enough to avoid paying tax on the anticipated profit.

Additionally, any income tax he must pay to the U.K. on the sale can be credited against any U.S. income taxes attributable to the sale. Form 1116 is used to claim the tax credit.

Whether he extends his visa or applies for residency does not matter as he is considered a resident for income tax based on his physical presence in the U.S.

Ask the adviser

To ask a question on Tax Talk, go to the “Ask the Experts” page, and select “Taxes” as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.