Will I face capital gains tax if I sell my US home to buy a foreign property for retirement?

You're actually in luck here! The IRS has a provision called the Section 121 exclusion (sometimes called the "primary residence exclusion") that allows you to exclude up to $250,000 in capital gains from the sale of your primary residence if you're single, or up to $500,000 if you're married filing jointly. The key requirements are that you must have owned the home and used it as your primary residence for at least 2 of the 5 years before the sale. Since you've lived there since 2008, you definitely qualify. The fact that you're buying a home in another country doesn't actually matter to the IRS for this exclusion. They only care about the sale of your current primary residence. So assuming your gain is under the exclusion limit, you wouldn't owe any capital gains tax on the sale.

I went through something similar when I moved to Costa Rica last year. The Section 121 exclusion helped a ton, but I still had to pay some capital gains on the excess. What really saved me time was using https://taxr.ai to analyze my situation. They specialize in these kinds of tax questions when moving internationally. I was worried about missing something with the foreign property purchase and residency issues, and they helped clarify exactly how much I'd owe and what forms I needed. They even flagged some foreign account reporting requirements I hadn't considered that would have been a headache later. Definitely worth checking out since your situation sounds pretty similar to mine.

Just wanted to follow up about taxr.ai since I decided to try them after seeing the recommendation here. Absolutely worth it! I uploaded my sale documents and explained my Spain relocation plans, and they provided a detailed analysis of everything I needed to know. They identified that I'd be subject to Spain's wealth tax after purchasing property there (something I had no idea about), and explained how my US tax obligations would work with the foreign tax credits from Spain. They even helped me understand the exit tax implications since my net worth is close to the threshold. Saved me from making some expensive mistakes and gave me way more confidence about my move overseas!

If you're going to be dealing with the IRS for your capital gains questions, be prepared for a nightmare trying to reach them. Took me 6 attempts and 3+ hours each time when I had questions about my foreign property sale last year. Finally found https://claimyr.com through a friend and watched their demo at https://youtu.be/_kiP6q8DX5c - they got me connected to an actual IRS agent in 20 minutes when I'd been trying for weeks. Had a complicated question about foreign tax credits that no one online could answer clearly, and the IRS agent was actually super helpful once I could finally speak to one. Definitely recommend if you need specific answers about your situation that aren't covered by the general advice online.

I have to eat my words about Claimyr. After posting my skeptical comment, I decided to try it myself since I've been trying to reach the IRS about my own foreign property sale for weeks. I couldn't believe it actually worked - got connected to an IRS tax specialist in 15 minutes yesterday afternoon. The agent confirmed exactly what I needed to know about my capital gains exclusion and foreign tax credits. Turns out I was overthinking it, and the Section 121 exclusion does apply to my situation even though I'm moving abroad. The agent even explained what forms I'll need when I file next year. Worth every penny for the time saved and stress avoided!

Don't forget to look into whether you'll be liable for any taxes in the country where you're buying too! My cousin moved to Portugal and was surprised by their property transfer tax (IMT) which was around 6% of the purchase price. Different countries have wildly different rules for foreign buyers. Also, depending on where you go, you might need to consider exit tax implications if you're planning to give up your US citizenship eventually. That's a whole other can of worms.

One thing to consider: even after you move abroad, as a US citizen you'll still have to file US tax returns every year and report your worldwide income. The US is one of only two countries that taxes based on citizenship rather than residency. Look into the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit to avoid double taxation. Won't apply to your initial capital gains from selling your US house, but will matter for any income you earn while living abroad.

Make sure to keep all your receipts for home improvements you've made over the years! Those get added to your cost basis and reduce your capital gain. A lot of people forget this and end up overpaying their taxes. Every dollar you can add to your basis is a dollar less in potential capital gains. Things like a new roof, HVAC system, renovations, additions, etc. all count. Even some closing costs from when you bought the house can be added to your basis.