How are Capital Gains Taxes Calculated for Selling Foreign Property?

Your parents will need to report the sale on their US tax return if they're US citizens or residents. Foreign property sales are subject to capital gains tax just like US properties, but there are some important differences. The tax rate depends on how long they've owned the property (short-term vs. long-term capital gains) and their overall income. For long-term gains (property owned more than a year), the rates are typically 0%, 15%, or 20% depending on their tax bracket. But they only pay tax on the profit - the selling price minus their adjusted basis (what they paid plus improvements). They should also know about the Foreign Tax Credit - if they pay taxes on the sale in the foreign country, they may be able to claim a credit on their US taxes to avoid double taxation. Form 1116 would be used for this. If they're planning to buy a new primary residence in the US, unfortunately, there's no tax break for rolling the gains into a new home anymore (that rule ended in 1997).

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Your parents might be in for a long wait if they need to clarify anything with the IRS about international tax matters. I tried calling the IRS international tax line for weeks about a similar foreign property sale question. It was completely impossible to get through - either busy signals or disconnections after hours on hold. I eventually discovered https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They basically hold your place in the IRS phone queue and call you back when an agent is about to answer. I was super frustrated and decided to try it as a last resort. Within 2 hours, I was talking to an actual IRS international tax specialist who answered all my questions about reporting requirements for my parents' property sale in Greece. Got confirmation about currency conversion methods and specific form requirements that saved us from making some serious mistakes on the return.

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One important thing nobody has mentioned yet is that your parents need to be aware of FIRPTA - the Foreign Investment in Real Property Tax Act. This only applies if they're not US persons (citizens or permanent residents) and are selling US property, not foreign property. But the reverse situation is important too! Many countries have their own version of FIRPTA that applies to foreign nationals (including Americans) selling property in their country. The foreign country might withhold a percentage of the sale proceeds regardless of actual gain. Your parents should check if the country where they're selling has a withholding requirement, as this could affect their cash flow even if they can later claim it back.

Something nobody's mentioned - if the total value of all foreign financial assets is over $10,000 at any point during the year, your parents likely need to file an FBAR (FinCEN Form 114). Selling a property worth $215-260k would definitely trigger this. There's also Form 8938 (Statement of Specified Foreign Financial Assets) which has different thresholds depending on whether they live in the US or abroad and whether they file jointly or separately. The penalties for not filing these forms can be severe, even if no tax is owed! This is separate from the actual tax on the capital gain.