Selling property abroad as a US citizen, including the mortgage gain nobody warns you about

Start with the fact that surprises everyone, because it is the one that costs the most and appears in no local closing statement: paying off a foreign currency mortgage can create a taxable gain in the United States, separate from and in addition to any gain on the property itself.

You can sell a property for less than you paid, in local currency, and still owe US tax, on the mortgage.

US tax on the sale is calculated by converting your purchase price to dollars at the exchange rate when you bought, and your sale price to dollars at the rate when you sold. The gain is the difference between those two dollar figures. The local currency outcome is irrelevant.

You bought an apartment in Madrid in 2013 for €300,000, when a euro cost around $1.30. Your basis is roughly $390,000. You sell in 2026 for €300,000, no gain at all in euros, when a euro costs around $1.17. Your proceeds are roughly $351,000.

You have a US loss of about $39,000, which on a personal residence is not deductible. Run it the other way and the arithmetic reverses. Bought when the dollar was strong, sold when it was weak, and you have a US gain on a property that did nothing.

This is the one that catches people, and almost nobody is warned.

Under section 988, a debt denominated in a foreign currency is treated as its own transaction for US tax purposes. When you repay it, you compare the dollar value of what you borrowed against the dollar value of what you repaid.

If your local currency weakened against the dollar between borrowing and repaying, you are settling the debt with fewer dollars than you received. That difference is gain, and it is ordinary income, not capital gain, so it is taxed at your marginal rate with no preferential treatment.

You borrowed €200,000 when a euro cost $1.35, roughly $270,000 of value received. You pay it off when a euro costs $1.10, roughly $220,000 of value surrendered. That is roughly $50,000 of ordinary income to the United States, from a mortgage you serviced faithfully in euros and never thought about.

The asymmetry makes it worse: where the movement goes the other way and you have a loss, a loss on a personal use mortgage is generally not deductible. Gains count. Losses often do not. This is triggered by repayment, which includes selling and paying off the loan, refinancing, or paying it down early.

Better news. The exclusion of gain on the sale of a main home is not limited to US property. Sell a home abroad that you owned and used as your principal residence for at least two of the five years before the sale, and you can generally exclude up to $250,000 of gain, or $500,000 on a joint return.

• It applies to the property gain, not to section 988 mortgage gain. The mortgage gain sits outside it.
• Periods when the property was rented can reduce the exclusion.
• The dollar conversion rules still apply, so the gain you are excluding is the dollar gain, not the local one.

You will usually pay tax where the property is. That tax can generally be credited against your US tax on the same income. Three reasons the credit frequently fails to cover the whole bill.

• Timing. The credit is claimed in the year the foreign tax is accrued or paid. Where your country taxes the sale in a different year, or on a different basis, matching them is not automatic.
• Basket rules. Foreign tax credits are segregated into categories, and credits from one category cannot offset US tax in another. Property gain and mortgage currency gain do not necessarily land in the same place.
• No foreign tax on the mortgage. Your country does not tax the currency movement on your own mortgage, because to it there is no currency movement, the loan was in its own currency. That amount is very often paid entirely to the United States and nowhere else.

If the property was ever a rental, you were required to depreciate it for US purposes, over 30 or 40 years for foreign residential property, depending on when it was placed in service, rather than the 27.5 years used domestically.

The critical part: on sale, your basis is reduced by depreciation allowed or allowable. If you never claimed it, the reduction happens anyway. You lose the deduction in the earlier years and still take the basis hit at the end.

Someone who rented out a foreign apartment for eight years without ever depreciating it on a US return has both overpaid tax annually and increased their gain on sale. That is fixable going forward, and sometimes retrospectively, but only if it is identified before the sale rather than after.

• Convert your purchase price at the historical rate and find out what your actual dollar basis is. Do this before you agree a price, not after.
• Calculate the section 988 position on the mortgage. If your currency has weakened materially since you borrowed, this may be the largest single item in the transaction.
• Check whether the residence exclusion is available and whether any rental period reduces it.
• Reconstruct any depreciation history, claimed or not.
• Map the foreign tax against the US tax by category and by year, and identify the piece with no foreign tax to credit against it.
• Consider timing. Currency rates move, tax years matter, and a sale that straddles a year end can be planned.

None of this is exotic and all of it is arithmetic. What it is not is something your local notary, agent, or accountant will raise, they are not looking at a dollar denominated tax system, and the mortgage gain in particular does not exist in their world at all.

If you have a sale in progress or coming, the section 988 position is worth calculating before you sign anything. A consultation will give you the number.

This article is general information, not tax or legal advice. Rules, thresholds, and exchange rates change, and whether any of this applies depends on your specific facts.