US · Journal
The Deemed Sale: What Counts as Your Asset on the Day Before
The exit tax treats everything you own as sold at fair market value the day before you expatriate — except four classes. Which assets, and how each one is valued.
The exit tax treats everything you own as sold at fair market value the day before you expatriate — except four classes. Which assets, and how each one is valued.
If you are a covered expatriate, section 877A treats all property you own as sold at its fair market value on the day before your expatriation date — and the gain is taxed in that year whether or not anything changed hands. Four classes of asset are carved out of that deemed sale and taxed under their own mechanics instead: eligible deferred compensation, ineligible deferred compensation, specified tax-deferred accounts, and interests in non-grantor trusts. Everything else is on the balance sheet, valued by the gift-tax valuation principles of section 2512, using good-faith estimates rather than formal appraisals.
That is the whole answer to "which assets?". The rest of this article is the part that is hard to find anywhere: how each carved-out class actually works, what the valuation standard means in practice, and the two places the mechanics catch people who have read three other explainers. It assumes you already know whether you are a covered expatriate — if not, start with the three covered-expatriate tests, because the deemed sale only ever reaches someone who meets one of them.
Every explainer repeats the phrase. Almost none says why it is there.
The IRS wording is exact: the mark-to-market regime means "all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date." Pushing the deemed sale back by twenty-four hours places the gain inside your final period as a US citizen or resident, not in the non-resident period that begins on the expatriation date itself.
Three consequences follow from that single day. The gain lands on the citizen or resident side of a dual-status return, where worldwide income is reported and where the graduated and long-term capital gain rates apply, rather than on the 1040-NR side. The valuation date is fixed — there is no alternate valuation date here of the kind the estate tax allows, whatever the markets did the following week. And anything you dispose of, gift or restructure has to be done before that day to be outside the deemed sale, with the real tax consequence that a real disposal carries. Timing the expatriation date is therefore the largest planning lever in the regime, which is why the relinquishment-versus-renunciation question is worth settling first.
Start from the default and work inwards: everything, wherever it is situated, held in whatever form, unless one of the four carve-outs applies. On the Form 8854 balance sheet that means listed shares, bonds and funds in US and non-US accounts alike; shares in a private company, including a UK limited company you control; partnership and LLC interests; real estate anywhere in the world, including your main home; crypto and other digital assets; cash and deposits; life insurance and annuity contracts; loans you have made; intellectual property and art.
It also means the assets of a grantor trust you are treated as owning, which are marked to market as if you held them directly. Only non-grantor trust interests are carved out, and that distinction does far more work than most people expect.
Gains and losses are then netted. Losses from the deemed sales are, in the instructions' words, "taken into account to the extent otherwise allowed under the Code" — but with one deliberate relaxation: "section 1091 (relating to the disallowance of losses on wash sales of stock and securities) doesn't apply." You are not deemed to have repurchased anything, so the wash-sale rule that would normally strike out a loss on a position you still hold is switched off for this one computation. For a portfolio holding both winners and losers that is worth real money.
From the net gain comes the exclusion: $890,000 for a 2025 expatriation, $910,000 for 2026, indexed from a statutory $600,000. It reduces the gain, not the tax. And it is not simply deducted at the bottom — see the allocation trap below.
The Form 8854 instructions list them in one short passage: "The mark-to-market tax does not apply to the following. Eligible deferred compensation items. Ineligible deferred compensation items. Specified tax deferred accounts. Interests in nongrantor trusts."
Not deemed sold does not mean not taxed. Each class has its own mechanic, and two of the four are considerably worse than a capital gain would have been.
1. Eligible deferred compensation — taxed on the way out, by the payor. A US-source pension or deferred bonus can qualify, but only on conditions: the payor must be a US person (or a non-US person electing to be treated as one for this purpose), you must notify the payor of your covered-expatriate status on Form W-8CE, and you must irrevocably waive, on Form 8854, any treaty right to a reduced withholding rate on that item. The prescribed wording is unsparing: "I irrevocably waive any right to claim any reduction in withholding for this eligible deferred compensation item under any treaty with the United States." The payor then withholds 30 per cent at source on taxable payments as they are made — a rate fixed by statute in IRC §877A(d)(1)(A), with no inflation mechanism attached to it. It is worth being clear that this is the tax itself and not a prepayment credited against a later return: §877A(d)(6) subjects the withheld item to tax under §871 and switches off the ordinary withholding machinery, which is what makes the treaty waiver a permanent price rather than a timing cost. The three buckets, and why the exclusion amount and the §877A(b) deferral election reach only the first of them, are set out in The Three Exit-Tax Buckets, and you file Form 8854 every year afterwards to certify that no distributions were received or to report those that were. If you are moving somewhere a treaty would otherwise have cut the US rate on pension income, that waiver is a permanent price — and it is the price of not being taxed on the whole pot up front.
2. Ineligible deferred compensation — taxed immediately, on the full present value. This is the default class: any deferred compensation item that is not eligible. The instructions are blunt about the result: "you are treated as receiving the present value of your accrued benefit as of the day before your expatriation date and you should include this amount on your Form 1040 or 1040-SR for the year that includes your expatriation date." A non-US employer's deferred plan — a foreign pension that is not a US-source arrangement, for instance — typically falls here, and it produces ordinary income on the entire accrued value in the expatriation year, with no exclusion amount to soften it because the exclusion only ever applies to the deemed sale. This is the single largest surprise in the whole regime and the reason the four classes are not a footnote.
3. Specified tax-deferred accounts — a deemed full distribution. A closed list: an individual retirement plan other than those described in section 408(k) or 408(p), a qualified tuition programme, a qualified ABLE programme, a Coverdell education savings account, a health savings account, and an Archer medical savings account. For each, "you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date." The character is ordinary income, not capital gain — an IRA with a large unrealised gain produces an inclusion at your marginal rate rather than at long-term capital gain rates. The early-distribution additional tax does not apply to the deemed distribution, which is the one piece of mercy on this row.
4. Interests in non-grantor trusts — withholding on distributions, or a ruling. Where you were a beneficiary of a non-grantor trust on the day before expatriation, distributions to you afterwards are subject to withholding, and you are treated as having waived any treaty reduction on them — "unless you elect to be treated as having received the value of your entire interest in the trust by obtaining a ruling from the IRS to that effect." In other words: a long tail of withheld distributions by default, or a single up-front inclusion if the IRS will tell you what your interest is worth. That ruling is not optional paperwork — as set out below, it is the only valuation on the whole form the IRS insists on doing itself.
The W-8CE notification in class 1 has a window, and it is the hardest date in the entire expatriation process. The instructions: "To timely notify the payor on Form W-8CE, you must file the Form W-8CE with the payor on the earlier of: The day before the first distribution on or after your expatriation date, or 30 days after your expatriation date."
It is the earlier of two dates, which means a distribution falling shortly after you expatriate shortens the window further — potentially to days. Miss it and the compensation item cannot be eligible, which drops it into class 2 and its immediate full-value inclusion. If you are expatriating with a US pension in payment, this is the diary entry that matters most, and it sits outside the Form 8854 filing cycle entirely.
Search this topic and you will find valuation firms arguing for appraisals and marketability discounts, and tax blogs conceding that the law is unclear. The Form 8854 instructions are considerably more helpful than either, and worth quoting directly.
The standard. "Use the FMV on the day before your expatriation date," where FMV "is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither has to buy or sell." That is the classic willing-buyer, willing-seller test.
The method. "To determine the value of your interests in property, use the valuation principles of section 2512 and the regulations thereunder." Section 2512 is the gift tax valuation rule — which is why gift-tax concepts such as discounts for lack of marketability or lack of control can be argued for a minority stake in a private company, and why a competent valuation of a family company for exit-tax purposes looks very like one prepared for a gift.
The evidential bar. "You can use good-faith estimates of FMV and basis." And: "Formal appraisals are not required." Almost no commercial article quotes that, and it is the most useful sentence on the page. It does not mean guessing: a good-faith estimate needs something behind it — a year-end broker statement, comparable sales for a flat, a recent arm's-length transaction in the company's shares — and it has to be consistent with what you have told other authorities. But you are not obliged to commission a valuation report for every line.
The one exception. For an interest in a non-grantor trust an estimate is not enough: "you must get a letter ruling from the IRS as to the value, if ascertainable, of your interest in the trust as of the day before your expatriation date." A letter ruling takes time and costs money, so a trust interest drives the timetable for the whole expatriation rather than the other way round.
Basis has a floor, and the floor is a date. Frequently missed, frequently valuable. "Generally, the cost or other basis in this column cannot be less than the FMV of the property on the date you first became a U.S. resident." For someone who moved to the United States with an already-appreciated portfolio or house, that floor can take years of pre-arrival growth out of the deemed-sale gain. The instructions add that "if you are a naturalized citizen or an LTR at the time you expatriated, you can make an irrevocable election under section 877A(h)(2) to determine basis without regard to this restriction" — an election to disregard the floor. It is irrevocable, it interacts with your foreign-tax and loss position, and it is exactly the kind of choice to model before signing rather than after.
Most articles present the exclusion as a subtraction: net the gains and losses, take off the exclusion amount for your year, tax the rest. The arithmetic usually lands in the same place, but the mechanic does not, and when it diverges it costs money.
The instructions require the exclusion to be allocated across gain properties pro rata — "by multiplying the exclusion amount by the ratio of the gain determined for each gain property in column (d) over the total gain of all gain properties listed in column (d)" — and then impose the cap that does the damage: "The exclusion amount allocated to each gain property can't exceed the amount of that gain property's built-in gain."
So the exclusion is shared out in proportion to each asset's own gain, and no asset can absorb more exclusion than its own gain. Where one or two assets hold nearly all the appreciation, the allocation is efficient and matches the simple subtraction. Where the gain is spread thinly across many small positions, parts of the allocation hit the per-property cap and some of the exclusion goes unused. The shape of the portfolio on the day before expatriation changes the charge, not only its total.
The deferral election is a separate decision again: property by property, irrevocable, interest running from the original due date rather than from the disposal, adequate security required — a bond or a letter of credit, though the statute leaves the form open rather than closed — and an irrevocable waiver of treaty rights that would otherwise prevent assessment or collection, which is narrower than giving up treaty benefits at large. It is not an instalment plan, and the broader picture sits on our renunciation and exit tax guide.
Almost every page on this subject finishes the sentence the same way: gains above the exclusion are "taxed at capital gains rates". That is close enough to be useful and wrong often enough to matter, because there is no single exit tax rate.
Section 877A puts the deemed gain into the tax year of the deemed sale and leaves the rest of the Code alone. Each deemed-sold asset therefore carries its own character and its own holding period into the computation, and a mixed balance sheet produces several rates at once:
That last point joins up with the allocation trap, and the join is the part nobody writes down: the exclusion's allocation is not rate-neutral. Because it is shared out pro rata by each property's share of total gain and capped at that property's own built-in gain, it lands wherever the gain happens to sit rather than where it would save the most tax. A covered expatriate whose appreciation is concentrated in a long-held index fund will see the exclusion absorbed against gain that was already going to be taxed at a long-term rate, while a collectible or a short-held position stays fully exposed at a higher one. There is no election that lets you point the exclusion at the expensive gain first.
Two cautions on the numbers. The net investment income tax is widely quoted as lifting the top rate on the deemed gain, and the IRS's own expatriation page does not say so — whether and how it reaches a particular item is a question to settle on your facts rather than assume from a headline rate. And the long-term tiers above are statutory rates, while the income bands that decide which tier applies are indexed every year; the 2027 expatriation figures, including the exclusion amount itself, had not been released when this article was last reviewed, so nothing here should be projected forward.
1. Fix the expatriation date first. Every figure hangs off the day before it.
2. Lift the four carve-out classes out of the asset list — pensions, IRAs, 529s, HSAs, trust interests — onto their own page. They do not belong in the deemed-sale netting, and mixing them in is the most common structural error on a self-prepared Form 8854.
3. Diary the W-8CE window, and start the trust letter ruling, the moment the date is fixed. These two are the only steps with external timetables.
4. Value the rest at FMV on that day, using good-faith estimates with evidence attached and section 2512 principles where an interest needs discounting.
5. Set basis against the arrival-date floor, and decide the section 877A(h)(2) election deliberately rather than by default.
6. Net the gains and losses, remembering the wash-sale rule is off, then allocate the exclusion pro rata and test the per-property cap instead of subtracting a single number — and price the remainder asset by asset, because the gain above the exclusion is not all taxed at one rate.
7. Reconcile to the five-year compliance certification — the deemed-sale figure is worth nothing if the certification fails. See five years of tax compliance before renouncing and the Form 8854 expatriation statement.
Next Tax Source prepares the deemed-sale schedule, the valuation file standing behind each good-faith estimate, and the Form 8854 balance sheet as one package — with the four carve-out classes computed separately and the exclusion allocated property by property. Every computation and return is reviewed and signed by an IRS Enrolled Agent who is also ACCA-qualified, so the US charge and the position in your new country of residence are judged together rather than in sequence by two advisers. We do not advise anyone to expatriate; we quantify what it would cost.
The service page is renouncing US citizenship. Our calculators cover the US side if you want to sketch the numbers first, pricing shows what a scoped engagement looks like, and you can book a consultation to have the asset list reviewed before any date is set.
Reviewed by an IRS Enrolled Agent who is also ACCA-qualified. This article explains general principles and is not advice on your own facts. The exclusion amount is indexed annually and the operative figure is the one set for your year of expatriation; confirm the current figures and your own position before acting.