Do I pay US tax when I sell my UK home?

Potentially. As a US citizen you report the sale of your UK home on your US return, and a capital gain can arise. The Section 121 exclusion can shelter up to $250,000 of gain ($500,000 for a qualifying married couple) on a main residence, and the foreign tax credit covers UK capital gains tax if any is due. But two things the exclusion doesn't cover can still create US tax: depreciation recapture if you ever let the property, and a Section 988 currency gain on repaying a pound mortgage.

Does UK Private Residence Relief work for US taxes?

No — they're separate systems. UK Private Residence Relief can fully exempt the gain on your main home from UK capital gains tax, but it has no effect on US tax. The US uses its own Section 121 exclusion, which is capped at $250,000 or $500,000. So a sale that's entirely UK-tax-free can still produce a US capital gain on any amount above the Section 121 cap — a mismatch that catches many people.

How much gain can I exclude when selling my UK main home?

Under the US Section 121 exclusion, up to $250,000 of gain if you're single, or $500,000 if you're married filing jointly and both meet the tests. You must have owned and used the home as your main residence for at least two of the five years before sale, and not used the exclusion on another home in the prior two years. The exclusion does not cover depreciation recapture or the Section 988 mortgage currency gain.

Why do I owe US tax on a UK home sale that was tax-free in the UK?

Because the two countries' main-home reliefs are different sizes. UK Private Residence Relief can exempt the whole gain; the US Section 121 exclusion is capped. If your gain exceeds the US cap, the excess is US-taxable even though the UK charged nothing — and with no UK tax paid, there's no foreign tax credit to offset it. Currency movements can also make the USD-measured gain larger than the pound gain you actually feel.

Is there US tax on my mortgage when I sell my UK home?

There can be. Repaying a pound-denominated mortgage on sale can trigger a Section 988 currency gain, taxed as ordinary income, if the pound weakened against the dollar since you took out the loan. This is separate from the gain on the house and is not covered by the Section 121 exclusion, so a sale that's otherwise sheltered can still produce this tax. A currency loss on the mortgage, unfortunately, isn't deductible.

Selling a UK Home as a US Citizen: Capital Gains and the §121 Exclusion

Selling your UK home should be the happy ending of property ownership — and on the UK side, for a main residence, it often is, thanks to Private Residence Relief. But for an American, the US tells a different story. The US main-home exclusion is capped where the UK's isn't, and two separate charges — depreciation recapture and a Section 988 mortgage gain — can survive even a "tax-free" sale. This guide explains exactly where US tax can arise, and why a sale that costs nothing in the UK can still cost something in the US.

The short answer

Selling your UK home is reportable on your US return, and a capital gain can arise — but the Section 121 exclusion can shelter up to $250,000 of gain ($500,000 for a qualifying married couple) on a main residence. The catch is that UK Private Residence Relief (which can exempt the whole UK gain) doesn't apply to US tax, and the US exclusion is capped — so a UK-tax-free sale can still create a US gain above the cap. Two things the exclusion never covers: depreciation recapture (if you ever let the property) and a Section 988 currency gain on repaying a pound mortgage.

Key takeaways

A UK home sale is US-reportable, with a possible US capital gain.
The Section 121 exclusion shelters up to $250k/$500k on a main residence.
UK Private Residence Relief exempts UK tax but has no US effect — and the US cap is lower.
A UK-tax-free sale can still produce US tax above the cap (with no UK tax to credit).
Depreciation recapture and the Section 988 mortgage gain survive the exclusion.

Executive summary

The sale of a UK main home sits on a fault line between two main-residence reliefs of very different sizes. UK Private Residence Relief can exempt the entire gain from UK capital gains tax; the US Section 121 exclusion caps the shelter at $250,000 (single) or $500,000 (married filing jointly). Where the gain exceeds the US cap, the excess is US-taxable — and because the UK charged no tax, there's no foreign tax credit to offset it. On top of that, two charges escape the exclusion entirely: depreciation recapture if the home was ever let, and a Section 988 currency gain on repaying a pound mortgage, taxed as ordinary income. The result is a sale that can be perfectly clean in the UK yet produce a real US bill — which is exactly why a US owner should model the sale before completing.

The UK side: Private Residence Relief

For a property that's genuinely been your only or main home throughout ownership, UK Private Residence Relief can exempt the gain from UK capital gains tax — often entirely. That's why many people sell their UK home and pay no UK tax. So far, so good — but this is a UK relief, and it does nothing for your US position.

The US side: the Section 121 exclusion (and its cap)

The US has its own main-home relief — the Section 121 exclusion — and importantly, it applies to a foreign home just as it does to a US one. The mechanics:

exclude up to $250,000 of gain if single, $500,000 if married filing jointly (both spouses meeting the tests);
you must have owned and used the home as your main residence for at least 2 of the 5 years before sale;
you mustn't have used the exclusion on another home in the prior 2 years.

For many sales, that's enough to cover the gain. The problem is when it isn't — because the US cap is fixed while the UK relief is uncapped.

The mismatch that catches people

Here's the trap in one sentence: a sale that's entirely tax-free in the UK can still be taxable in the US. Picture a long-held London home with a large gain, fully covered by UK Private Residence Relief. On the US side, only the first $250,000/$500,000 is excluded; the excess is US-taxable — and because the UK charged no capital gains tax, there's no foreign tax credit to offset the US charge. You feel it as US tax on a sale you thought was tax-free.

A second, subtler factor: the US measures the gain in dollars, using exchange rates at purchase and sale. If the dollar strengthened over your ownership, the USD gain can be larger than the pound gain you actually experienced — inflating the taxable amount. We compare the two systems' mechanics in UK CGT vs US capital gains tax on property.

Two charges the exclusion never covers

Even when Section 121 shelters the headline gain, two separate charges can survive:

1. Depreciation recapture. If you ever let the property and claimed (or were entitled to claim) US depreciation, that depreciation is recaptured on sale — taxed at up to 25% — regardless of the Section 121 exclusion. The exclusion covers appreciation, not depreciation. (See US tax on UK rental income.)

2. The Section 988 mortgage currency gain. Repaying a pound mortgage on sale can produce a Section 988 gain — taxed as ordinary income — if the pound weakened against the dollar since you borrowed. It's separate from the house gain and not covered by Section 121. A currency loss, frustratingly, isn't deductible. This one deserves its own read: the Section 988 mortgage currency gain trap.

Where UK tax is due: the foreign tax credit

If your sale does attract UK capital gains tax — common for a property that wasn't your main home throughout, or a second home — then the UK taxes it (with a 60-day reporting-and-payment deadline), and you claim a foreign tax credit for that UK tax against the US tax on the same gain. The credit prevents full double taxation. The painful cases are the ones above, where no UK tax was due to credit.

Common mistakes we see

Assuming a UK-tax-free sale is US-tax-free — the caps differ.
Forgetting depreciation recapture after years of letting.
Overlooking the Section 988 mortgage gain on repayment.
Ignoring currency effects that inflate the USD gain.
Selling before modelling — by completion, the planning options are gone.