US-UK · Journal
Selling Your UK Main Home as a US Citizen
UK Private Residence Relief is uncapped; the US section 121 exclusion is not. How a tax-free London sale still produces a US bill with nothing to credit.
UK Private Residence Relief is uncapped; the US section 121 exclusion is not. How a tax-free London sale still produces a US bill with nothing to credit.
UK Private Residence Relief can remove the entire gain on your only or main home, with no upper limit. The US exclusion under section 121 of the Internal Revenue Code is capped — up to $250,000 of gain, or $500,000 on a joint return. For a US citizen selling a London house, that single difference means the sale can be completely tax-free in the UK and still produce a large US tax bill, with no UK tax paid to credit against it.
It is the most expensive surprise in US-UK personal tax, and usually avoidable with a year or two of notice. Selling a rental or second home instead? Start with CGT when a US citizen sells UK property.
The UK relieves the home by reference to time: for every month the property was your only or main residence, the matching slice of the gain is exempt. If that is every month you owned it, the whole gain goes, however large.
The US relieves it by reference to amount: qualify, and a fixed dollar sum comes out. Everything above the cap is an ordinary long-term capital gain, and living there thirty years rather than two earns nothing more.
So the UK answer scales with the gain and the US answer does not. On a modest house the two systems land in roughly the same place. On a London home bought twenty years ago, they do not come close.
HMRC's guidance gives automatic full relief where you have one home, have lived in it as your main home for all the time you owned it, have not let part of it out (a lodger does not count), have not used part of it exclusively for business, the grounds including all buildings are under 5,000 square metres, and you did not buy it just to make a gain. Fail one and the relief is apportioned rather than lost: qualifying occupation over total ownership.
HS283 confirms that "the final 9 months of your period of ownership always qualify for relief", whatever the property was used for in that window, provided it was your only or main residence at some point. For a disabled person or care home resident, "the final 36 months of ownership may qualify for relief". This is the rule that lets you move out, market the house and keep the relief.
HS283 treats certain absences as residence, provided there is a time both before and after the absence when the house is your only or main residence:
The second category matters enormously to Americans: a US citizen who keeps a London house and takes a posting entirely outside the UK can, on the right facts, preserve UK relief across the whole posting. Section 121’s equivalent is far narrower, and most Americans abroad will not reach it: §121(d)(9) allows the five-year period to be suspended during qualified official extended duty, capped at a ten-year extension, and it is confined to the uniformed services, the Foreign Service, the listed intelligence community and the Peace Corps. For an ordinary civilian posting the clock does run regardless of why you left.
Lettings relief used to rescue anyone who had rented the house out. HS283 now requires that part of the home was let as residential accommodation "at the same time that another part of the dwelling house" was your only or main residence, and says it does not apply where the whole dwelling house was let for a time. That is shared occupancy only, so the classic "we moved abroad and let the house" case gets nothing. Where it applies, the relief is the lowest of the PRR already calculated, "£40,000", and the gain attributable to the letting.
With two residences you can nominate which is the main one, and HS283 is strict: "Your nomination must be made within 2 years of the date you first have a particular combination of residences", and if the combination changes, "a new 2-year period begins". Without one, HMRC decides on the facts. Married couples and civil partners have only one main residence between them at a time.
Topic 701 and Publication 523 set the exclusion at $250,000 of gain, increased "to $500,000 for a married couple filing jointly". Publication 523 conditions the joint figure on both spouses meeting the residence and look-back requirements, with "only one spouse has to meet the ownership requirement".
Note what is not in section 121: any requirement that the home be in the United States. The exclusion applies to a house in Islington exactly as to one in Illinois — and so does the cap, unscaled for a market where the house cost four times as much.
Both tests run against the five-year period ending on the date of sale. You must have "owned the home for at least 24 months (2 years) out of the last 5 years" and "used it as a residence for at least 24 months (2 years) of the previous 5 years" — described in Publication 523 as "a total of 24 months (730 days) of residence during the 5-year period". The months need not be consecutive, and the two tests can be met in different windows.
The bite comes on the way out. An American who leaves the UK, lets the house for four years and then sells has failed the two-year use test. That usually means no exclusion, but not always: §121(c) can still give a reduced exclusion where the sale is by reason of a change in place of employment, health, or unforeseen circumstances as defined by regulation. It prorates the cap rather than the gain, and it is not automatic — it needs one of those qualifying reasons. Where the home was let, §121(b)(5) separately restricts the exclusion by reference to the period of non-qualified use — while the UK, on the same facts, may still relieve most of the gain through the occupation fraction plus the final nine months. The mismatch runs both ways.
Publication 523 is blunt: "You may take the exclusion only once during a 2-year period." Sell a US home under section 121 and a UK home eighteen months later, and the second sale is fully taxable however long you lived there — a trap couples relocating between two countries walk into routinely.
A couple who lived in their London house throughout ownership get unlimited UK relief and pay HMRC nothing. The same sale produces a dollar gain on the US return, $500,000 comes out under section 121, and the rest is a long-term capital gain taxed at up to 20% plus, where the thresholds are met, the 3.8% net investment income tax. Topic 559 confirms the NIIT does not reach "gain from the sale of a principal residence on that portion that's excluded for income tax purposes": the excluded slice is safe, the excess is not.
The figures below are illustrative and show the mechanics only. They are not a prediction and not advice, and the exchange rates are invented round numbers, not published rates.
A married US-citizen couple filing jointly bought a London house in 2010 for £500,000 and sell in 2026 for £1,400,000. It was their only residence throughout. They spent £60,000 on a capital extension in 2016 and pay £40,000-equivalent in fees.
UK side: full Private Residence Relief. Chargeable gain £0. UK CGT nil.
US side, translating each item at the rate on its own date (illustrative rates: 1.55, 1.45, 1.35):
| Item | Sterling | Rate | Dollars |
|---|---|---|---|
| Purchase price (2010) | £500,000 | 1.55 | $775,000 |
| Capital improvement (2016) | £60,000 | 1.45 | $87,000 |
| Adjusted basis | | | $862,000 |
| Sale proceeds (2026) | £1,400,000 | 1.35 | $1,890,000 |
| Less selling costs | | | ($40,000) |
| Amount realised | | | $1,850,000 |
| Dollar gain | | | $988,000 |
| Less section 121 exclusion | | | ($500,000) |
| Taxable US gain | | | $488,000 |
At an assumed 20% long-term rate plus the 3.8% NIIT, that is roughly $116,000 of US tax on a sale that cost nothing in the UK. The real rate depends on their total income for the year, so treat 23.8% as an illustration of the ceiling, not a calculation of their bill. Note too that almost nothing reduces the $488,000 after the fact — the levers are all upstream.
The IRS rule is short and consequential: "You must express the amounts you report on your U.S. tax return in U.S. dollars", using "the exchange rate prevailing when you receive, pay, or accrue the item". For a property that means two rates — purchase-date for basis, sale-date for proceeds — potentially sixteen years apart.
The dollar gain is therefore the sterling gain plus or minus a currency effect you never chose to take. Illustratively: buy for £800,000 when the pound is worth $1.53 and sell for exactly £800,000 when it is worth $1.70, and you have made nothing in sterling and a $136,000 gain in dollars. No UK tax, and a reportable US capital gain.
It runs the other way too: where sterling has weakened the dollar gain can be far smaller than the sterling one, occasionally a dollar loss — though a loss on a personal residence is generally not deductible on either side (HS283 confirms a loss on a home that would have attracted relief "is not an allowable loss"). More in currency exchange gains and losses.
The house is one transaction. The mortgage is another.
Section 988 treats acquiring a debt instrument, or becoming its obligor, as a section 988 transaction, with foreign currency gain or loss measured by the rate movement between booking and payment and generally treated as ordinary income or loss. A dollar-functional borrower who takes £400,000 when sterling is strong and repays when it is weak has discharged the debt with fewer dollars than it was booked at — a gain in the eyes of the Code, though the sterling figure never moved. Illustratively, £400,000 drawn at $1.30 ($520,000) and repaid at $1.20 ($480,000) is a $40,000 foreign currency gain: ordinary rather than capital, and not sheltered by section 121, which covers gain on the residence and says nothing about the debt.
This position needs care. Section 988(e) disapplies the section for "any section 988 transaction entered into by an individual" that is a personal transaction, defining that by reference to whether allocable expenses would qualify under section 162 or section 212. Whether a mortgage on a personal residence sits inside that exception is genuinely argued both ways, and the separate $200 de minimis in section 988(e)(2) is drafted for disposals of currency itself rather than debt. This point is unsettled — the treatment of a sterling mortgage on a personal residence must be settled on your own facts and documented before filing. The interest side is covered in UK home mortgage interest on a US return.
Two hopes come up in every conversation; neither survives contact.
The treaty. The Treasury technical explanation of the US-UK convention states that Article 13 provides that, except as provided in the shipping and air transport article, capital gains are taxable in accordance with the domestic laws of the Contracting States — and that Article 13 is subject to the saving clause in Article 1, under which each country may tax its own citizens as if the treaty did not exist. No article hands a UK main-residence gain exclusively to the UK.
The credit. Gain on a UK house is foreign-source: section 862(a)(5) treats "gains, profits, and income from the sale or exchange of real property located without the United States" as income from sources outside the US. Good news in principle, since only foreign-source income can absorb a foreign tax credit. But a credit needs foreign tax actually paid or accrued, and PRR produced none.
The uncomfortable corollary: UK relief is not costless, because an exemption on a large gain removes the very foreign tax that would have sheltered the US liability. Where a disposal is a close call, that trade-off deserves modelling rather than an assumption that the exempt route always wins.
Do not let a nil liability lull you. UK residential disposals must be reported and any tax paid "within 60 days of completing the sale of the property".
If you are non-UK resident when you sell, HMRC requires a report even where you have no tax to pay or made a loss — the 60-day deadline applying to completions on or after 27 October 2021, and 30 days before that. Americans who have already moved home miss this most often, precisely because the sale was fully relieved.
GOV.UK gives CGT rates of 18% within the basic rate band and 24% above it from 6 April 2026, with a £3,000 annual exempt amount. Confirm the rate for a residential disposal at your actual completion date: that page sets out no separate residential rate, and the rates have moved more than once recently.
Most states with an income tax start from federal adjusted gross income and so inherit the section 121 exclusion, but conformity is not universal, a few tax capital gains as ordinary income, and residency rules differ sharply — California and New York in particular are slow to accept that you have left. Confirm your state's conformity to section 121 and your residency position for the year of sale before modelling net proceeds.
The decisions that matter are all made before the house goes on the market.
Three situations should not be run from an article: a sterling mortgage repaid on the sale, because the section 988 position is unsettled; a large gain where the US exclusion fails on the use or look-back test; and a property part-owned by a non-US spouse, which pulls in gift and estate questions too. Each needs a written position and human review before filing.
If you are a US citizen with a UK main home and a sale in prospect, the useful work is a two-currency model of the gain and a check of the section 121 clock — ideally twelve months before you instruct an agent, while the timing levers still exist. As US-UK tax specialists we model the position in sterling and dollars, document the exchange rates and the mortgage treatment, and prepare both filings ready for signature. Every US return is reviewed and signed off by an IRS Enrolled Agent who is also ACCA-qualified for the UK side. If a sale is on the horizon, book a consultation.
This article is general information about how two tax systems interact. It is not advice, your outcome depends on your own facts and dates, and reliefs and figures change — confirm the current position before acting on it.