The Covered Expatriate And The IRC 121 Principal Residence Exclusion - Available Or Not?

January 7, 2022 - Participants Include:

 

Virginia La Torre Jeker - @VLJeker

 

John Richardson - @Expatriationlaw

 

The Background - An Exclusion From Capital Gains

 

Internal Revenue Code Section 121 provides (in certain circumstances) a $250,000 exclusion from taxation on the capital gain on the sale of a principal residence.

 

Covered Expatriates, The Exit Tax and "Deemed Capital Gains"

 

When a covered expatriate renounces US citizenship he/she is subject to a capital gains tax based on the deemed sale of all property. Specifically 877A includes:

26 U.S. Code § 877A - Tax responsibilities of expatriation

(a)General rules For purposes of this subtitle—

 

(1)Mark to market

All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.

(2)Recognition of gain or lossIn the case of any sale under paragraph (1)—

A)

notwithstanding any other provision of this title, any gain arising from such sale shall be taken into account for the taxable year of the sale, and

 

The Issue:

Do the words "notwithstanding any other provision of this title" mean that the S. 121 exclusion is not available to "covered expatriates" renouncing US citizenship?

 

On January 6, 2022 Dubai based US tax lawyer wrote a post discussing this issue:

https://us-tax.org/2022/01/06/covered-expatriates-exit-tax-and-the-principal-residence/

On January 7, 2022 Virginia joined me to explore this issue in this podcast.