Figures relate to tax year 2025 (US) · 2025-26 (UK)
Selling the family home in the UK is usually a non-event for tax: private residence relief covers the gain and nobody thinks about it again. For an American, two features of US law can turn the same sale into a real tax bill — and one of them surprises even people who knew about the first.
The US exclusion is capped, and the UK relief is not
The US allows an exclusion on the gain from selling a main home — $250,000 for a single filer, $500,000 for a married couple filing jointly — provided you owned and lived in the property for two of the previous five years. Everything above that is taxable capital gain.
UK private residence relief has no cap. So a London property bought fifteen years ago and sold at a substantial gain can be entirely tax-free in the UK and generate a significant US bill on the excess. And because the UK charged nothing, there is no UK tax to claim as a foreign tax credit against it.
No UK tax paid means no foreign tax credit available. The relief that protects you in one country removes your defence in the other.
The mortgage currency trap
This is the one people do not see coming. US law treats a foreign-currency mortgage as a separate transaction from the property. If sterling has weakened against the dollar between taking out the mortgage and repaying it, you have repaid the debt with cheaper dollars — and the US treats that saving as taxable ordinary income.
It applies on repayment and on remortgaging, it is taxed at ordinary rates rather than capital gains rates, and there is no exclusion for it. On a large mortgage across a significant currency move, the amount is not small.
Planning levers, all of which need to be early
- Timing the sale within the two-of-five-year window that qualifies for the exclusion.
- Ownership structure between spouses, particularly where one is not a US person.
- Capital improvements documented properly — they raise your US basis and reduce the gain.
- Modelling the mortgage gain before remortgaging, not after.
- Sale timing relative to other income and the net investment income tax thresholds.
None of these work retrospectively. The pattern with property is always the same: the year before the sale is where the planning lives, and the year after is where the invoice does.
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Official guidance from the IRS, FinCEN and GOV.UK. Thresholds and rates on those pages are updated annually — check the current tax year before relying on a figure.
