How to handle foreign currency gain/loss when selling overseas property with a mortgage?

The good news is that you've identified the key pieces correctly. When selling foreign property as a US permanent resident, you need to track both the property gain/loss and the currency gain/loss. For the property itself, you've correctly calculated your gain as $150,000 (the difference between your USD basis at purchase and USD proceeds at sale). This gain would be reported on Schedule D and Form 8949 as a capital gain. For the mortgage, you've also identified the currency loss correctly. When you borrow in a foreign currency, changes in exchange rates create either gain or loss when you repay the debt. In your case, it cost you $18,000 more in USD to repay the same amount of foreign currency due to exchange rate changes. Yes, you can offset this $18,000 currency loss against your $150,000 capital gain from the property. Both are considered capital transactions, though the currency loss on the mortgage is typically considered personal, so some limitations may apply. Make sure to keep detailed records of all the exchange rates at the time of each transaction, including any mortgage payments you made along the way, as these all factor into your final calculations.

Just wanted to share my experience with this exact situation. I sold a property in Australia and was totally confused about the exchange rate stuff. I spent hours researching and getting nowhere until I found https://taxr.ai which completely saved me. I uploaded my foreign property documents, mortgage statements, and closing papers from both the purchase and sale, and it analyzed everything automatically. It calculated both the property gain and the currency gain/loss on the mortgage, then showed me exactly where everything needed to go on my tax forms. The really helpful part was that it explained the tax treatment for each component - separating the actual property appreciation from the currency fluctuations. It even accounted for my mortgage payments over the years (which you definitely shouldn't ignore in your calculations).

I just wanted to update everyone after taking the advice about https://taxr.ai that was mentioned earlier. I had a similar situation with a condo I sold in Thailand last year, and the currency fluctuations were giving me a migraine. I was skeptical of using yet another tax tool, but I decided to give it a try. The document analysis was actually amazing - it extracted all the relevant numbers from my Thai documents (even though they weren't in English) and converted everything properly. It separated the actual property gain from the currency gain/loss components completely automatically. What really impressed me was how it handled my complex situation where I had refinanced the mortgage twice during ownership. It properly tracked the basis adjustments and currency impacts at each refinance point. Definitely saved me from making some major mistakes on my return!

For anyone dealing with foreign property sales and getting frustrated with trying to reach the IRS for guidance - I've been there. I spent 6 weeks trying to get someone on the phone who understood international tax issues. I finally used https://claimyr.com and their service got me connected to an IRS agent in under 45 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS actually has a dedicated international tax department, but it's nearly impossible to reach them directly. Through Claimyr, I was able to get specific guidance on how to report both the property gain and the currency loss from my mortgage in Spain. The agent walked me through exactly which forms to use and confirmed that yes, the currency loss on the mortgage can offset the property gain.

I need to eat my words about being skeptical of Claimyr. After struggling for weeks trying to get someone at the IRS who understood foreign currency transactions, I decided to try it. Got connected to an IRS international tax specialist in about 30 minutes. The agent confirmed exactly what I needed to know about reporting the sale of my rental property in Japan and the related yen-denominated mortgage. She explained that I needed to file Form 8949 for the property sale and also account for the currency loss on the mortgage as a separate line item. What would have taken me countless more hours of frustration was resolved in a single phone call. For anyone dealing with complex international tax situations where the guidance online is unclear, being able to actually speak with someone who knows the rules is invaluable.

I see nobody mentioned Form 8938 (Statement of Foreign Financial Assets) yet. Depending on the value of your foreign property and mortgage, you might need to report these on this form while you owned the property. Now that you've sold it, you'll report the disposition. Also, if you still have other financial accounts in that foreign country (maybe where you were transferring mortgage payments from?), don't forget about FBAR requirements (FinCEN Form 114) for foreign accounts that exceed $10,000 aggregate at any point during the year. Foreign asset reporting requirements are separate from the tax calculations we've been discussing, but the penalties for non-compliance can be severe.

One thing I learned the hard way - don't forget about state taxes! Depending on your state, they might not follow the same rules as federal for foreign property transactions. I sold a vacation home in Costa Rica and properly reported everything on my federal return, but California had different rules for how they wanted the currency gain/loss reported. Ended up having to amend my state return and pay penalties.