The IRS allows up to $250,000 (single) or $500,000 (married) in capital gains tax exemption on the sale of a primary residence — if you lived in it for 2 of the last 5 years.
The 3-year rule — use it before you leave
The IRS allows up to $250,000 (single) or $500,000 (married) in capital gains tax exemption on the sale of a primary residence — if you lived in it for 2 of the last 5 years.
The critical clock: You have 3 years after you stop living there to still qualify for the exemption (because 2-of-5-years means up to 3 years after leaving still count).
If you bought a home 4 years ago, lived in it, and moved back to India — you have until year 5 from original purchase to sell and claim the exclusion.
After that: all capital gains are taxable.
FIRPTA — the 15% withholding problem
When a "foreign person" sells US real estate, the buyer is required to withhold 15% of the sale price and send it to the IRS. This is FIRPTA (Foreign Investment in Real Property Tax Act).
The problem: You need that 15% for your moving expenses, India setup, etc. You get it back when you file your US tax return — but that takes months.
| Sale price | FIRPTA withheld | When you get it back |
|---|---|---|
| $500,000 | $75,000 | 6-18 months after filing |
| $700,000 | $105,000 | 6-18 months after filing |
| $1,000,000 | $150,000 | 6-18 months after filing |
Workaround: Apply for a FIRPTA withholding certificate before closing. If your actual tax is less than 15% of sale price, the IRS issues a reduced withholding certificate. Takes 90 days to get.
Sell vs rent decision
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| Situation | Consider selling | Consider renting |
|---|---|---|
| Lived there under 5 years | Sell to use the exclusion before 3yr clock expires | Only if appreciation is strong |
| Lived there 5+ years | Sell (exclusion expired either way) | If rental yields 5%+ net |
| Strong rental market | Either | Rent — use property management company |
| Plans to return to US in 5yr | Strongly consider renting | Keep the asset |
| No plans to return | Sell — easier than remote landlording | Only if appreciation outlook is strong |
If you rent out the property
- You're a non-resident landlord — 30% withholding applies to rental income by default
- Elect to treat rental income as "effectively connected income" (Form W-8ECI) → taxed at graduated rates instead of flat 30%
- Hire a US property management company and a CPA familiar with NRA rental income
State taxes on sale
Some states (California, New York) also withhold on FIRPTA sales. California: 3.33% additional withholding.
Watch the returning to India video →
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