Direct answer
Yes, if you are a covered expatriate. If any one of three tests applies, the home is treated as sold at market value the day before you expatriate, and gain above the 2026 exclusion of $910,000 per person is subject to federal tax.
The three tests are net worth of $2M on the expatriation date, meaning worldwide assets at market value minus liabilities, with the home counted net of any mortgage; average annual federal income tax above $211,000 over the 5 tax years before expatriation (the 2026 threshold, Rev. Proc. 2025-32); and inability to certify 5 years of federal tax compliance on Form 8854. All of this assumes you are a long-term resident: you held a green card in at least 8 of the 15 tax years ending with the year you expatriate.
So choosing between selling first and keeping the home doesn't avoid the tax. What differs is the timeline. In timeline A, you sell before filing Form I-407. You are still a U.S. tax resident, Section 121 applies, there is no FIRPTA withholding at closing, and the proceeds still count toward your net worth. In timeline B, you keep the home through expatriation. It is deemed sold once, the day before, and its federal basis steps up to that day's market value. When you actually sell later, you sell as a foreign seller: 15% FIRPTA and California's 3⅓% Form 593 withholding come off at closing, and you recover the excess by filing Form 1040-NR. Selling after expatriation is the second half of B, not a third way around the deemed sale. In this article's example (cost $2M, value $5M, owned 50/50 by a couple, no other appreciated assets), the federal taxable gain is $2.5M under A and about $1.18M under B. Once the couple's other gains exceed about $1.32M, A costs less.
This article covers long-term green card holders only. It doesn't weigh whether to give up status; it explains the rules and runs the numbers. Citizens who renounce face broadly the same rules, with exceptions such as those for dual citizens from birth that are outside this article's scope. This article is for decision education and is not legal or tax advice; confirm any action with your attorney and CPA.
Who this article is for
- Families who, as of the year they plan to surrender their green cards, have held them in 8 or more of the past 15 tax years, and are preparing to file Form I-407 and move back home or to another country. Years are counted by tax year (calendar year), not as eight full 365-day periods. In practice, holding the card at any point in a year is widely treated as counting for that year, so you may already be at 8 with fewer than 8 full years on the card.
- Owners of a home around $5M in cities such as Palo Alto and Los Altos. In MK Bay Area Pulse Q3 2026 (MLSListings single-family closings across three counties), Palo Alto recorded 103 single-family sales at a median $4,200,000, and Los Altos 72 at a median $4,910,150. With no mortgage and the home split between spouses, that is $2.1M to about $2.46M each, past the net worth line on the home alone.
- Owners who have already left the Bay Area, with the home vacant or rented, who are working out whether to sell first or file Form I-407 first.
- Parents who plan to leave the home, or the sale proceeds, to children who work and live in the U.S.
Three dimensions that decide how the tax lands
One: are you a covered expatriate? First the long-term resident threshold, then the three tests
The exit tax reaches two groups: U.S. citizens who renounce, and long-term residents. The Form 8854 instructions define a long-term resident as someone who was a lawful permanent resident in at least 8 of the 15 tax years ending with the year residency ends. Years in which you were treated as a resident of another country under a tax treaty, and did not waive treaty benefits, don't count. Whether that applies to you, and which forms must be attached, is for a CPA to check year by year.
Past that threshold, any one of the three tests makes you a covered expatriate. The home matters mostly for the net worth test. It counts at market value on the expatriation date less any mortgage, per person, for your own share only. The Form 8854 balance sheet also asks for the present value of retirement accounts, deferred compensation and stock options. For families with years at Bay Area technology companies, those lines often add up. If none of the three tests applies, expatriation itself puts no tax on the home, and you are back to the ordinary question of selling or keeping after a move. Section 121 requires that you lived in the home 2 of the 5 years before the sale; three years after you move out, a couple's $500K exclusion is gone. See We're Relocating Abroad — Should We Sell the Bay Area House or Keep It as a Rental?
Two: how much other appreciation you hold on the expatriation date
For a covered expatriate, the 2026 exclusion is $910,000 per person (Rev. Proc. 2025-32 §3.38), once in a lifetime. Under Notice 2009-85, it is allocated in proportion to gain across every appreciated asset you hold the day before expatriation: the home, stocks, vested RSU shares. Retirement accounts and deferred compensation follow separate rules and are not part of the allocation.
That sets the real cost of selling first. Sell before you expatriate, and the home's gain is taxed under the ordinary rules in the year of sale. The exclusion can't touch it and is left for whatever appreciated assets you still hold on the expatriation date. If nothing else has much gain, the two $910K exclusions go unused. For a family with large stock gains, the reverse holds: those assets use up the exclusion on either path, and selling the home first wastes nothing. On the example below (cost $2M, value $5M, split 50/50), the crossover is about $1.32M, assuming the deemed sale can't also use Section 121; if it can, the crossover is $1.82M. If the couple's other assets carry more gain than that, selling before expatriation already costs less. Between $1.32M and $1.82M, selling first wastes part of the exclusion, but less than the $500K that Section 121 saves. Above $1.82M, both paths use up the exclusion, and A keeps a Section 121 exclusion that is certain to apply.
Three: your tax status on the day the home sells
Under A, the seller is a U.S. tax resident. Section 121 applies as long as you lived there 2 of the past 5 years: $250K each, $500K for a couple. The seller signs a non-foreign certification, so no FIRPTA withholding is triggered, and a home that qualifies as a principal residence under Section 121 can also claim the California Form 593 exemption. There is one hard constraint: the sale has to close before you file Form I-407. A signed contract doesn't count. Time on market is rarely the bottleneck. In Pulse Q3 2026, the median Palo Alto single-family home sold in 9 days and the median Los Altos home in 8. What trips people up is the order of the closing date and the immigration steps.
B runs in two stages. The deemed sale the day before expatriation is taxed as a resident and reported on the dual-status return for the expatriation year (Form 1040-NR with Form 1040 attached), together with Form 8854. You can elect to defer that tax, but you must post security, and interest accrues. When you actually sell later, you are a nonresident alien, and 15% of the price is withheld under FIRPTA at closing. Before closing, you can apply for a withholding certificate to bring that down to the tax actually owed; the process is in A Foreign Seller Just Had 15% of a Bay Area Sale Held Back by the IRS—How Does FIRPTA Money Come Home? If you have moved back to China, you are most likely a Chinese tax resident by then, and the gain must also be reported there as foreign-source property-transfer income, with credit for U.S. tax paid. See I've Moved Back to China, Sold Our Bay Area Home, and Paid the U.S. Tax. Do I Still Owe China Another 20%?
The three tests: your home counts at net equity, per person
The core numbers first. For long-term residents expatriating in 2026, the three lines are net worth of $2M (a statutory figure, not indexed for inflation), average annual federal income tax of $211,000 over 5 years, and 5-year compliance certification. Meeting any one makes you a covered expatriate. The home counts at net equity, market value less mortgage, for your own share: a $5M home with no mortgage, split 50/50 between spouses, is $2.5M each, past the first line on the home alone.
| Test | Threshold for 2026 expatriation | How it is measured | Where the home fits |
|---|---|---|---|
| Threshold question: long-term resident? | Green card held in at least 8 of the 15 tax years ending with the year you expatriate | Counted in tax years; years treated as a foreign resident under a tax treaty, without waiving treaty benefits, don't count | Unrelated to the home; if you don't meet this, the three tests don't apply and there is no deemed sale |
| Net worth test | Net worth of $2M on the expatriation date | Worldwide assets at market value minus liabilities, per person; the Form 8854 balance sheet includes the present value of retirement accounts, deferred compensation and stock options | Market value less mortgage, for your own share; a $5M home with no mortgage, split 50/50, is $2.5M each |
| Average tax test | Average annual federal income tax above $211,000 over the 5 tax years before expatriation | Income tax on each year's return, net of foreign tax credits, averaged over 5 years | Capital gains tax on a home sold in those years counts toward that year's tax |
| Compliance test | Certifying on Form 8854 that every federal tax obligation was met for the past 5 years | Filing and payment of income, employment and gift tax, plus information returns | If the home was ever rented, whether the rent was fully reported is part of what you certify |
Sources: IRS Instructions for Form 8854; IRS, Expatriation Tax; Rev. Proc. 2025-32 §3.37; Notice 2009-85. How average tax is attributed between spouses who file jointly is for your CPA to confirm against IRS guidance.
What to remember: the three tests are alternatives. Someone with net worth under $2M and average tax under $211,000 is still a covered expatriate if Form 8854 goes unfiled or five years of compliance can't be certified. One more point. If your net worth was $2M or more at any time in the 5 years before expatriation and has dropped below that by the expatriation date, Form 8854 asks you to attach an explanation of the change, and the example the IRS instructions give is a gift of real property. However your assets move before expatriation, the record ends up on this form.
Two timelines: where the federal tax lands on a $5M home
Both timelines use the same assumptions. A married couple, both long-term residents, expatriate in 2026. The home is community property, held 50/50, bought for $2M (including improvements) and worth $5M today, with no mortgage, lived in until they left. To make the difference clear, assume for now that the home is the couple's only appreciated asset.
The core numbers first. Under A, selling before expatriation, the federal taxable gain after the $500K Section 121 exclusion is $2.5M. Under B, keeping the home, it is about $1.18M after the two $910K exclusions, or about $680K if the deemed sale can also use Section 121. B's cost comes in the second half. Sell later at $5M, and $750K of FIRPTA and about $167K of California withholding come off at closing. The federal basis is already $5M, so that $750K has to come back through Form 1040-NR.
| Item | A: sell before expatriating | B: keep the home through expatriation (deemed sale the day before, actual sale later) |
|---|---|---|
| Tax status at sale | U.S. tax resident; the sale must close before you file Form I-407 | Deemed sale taxed as a resident; at the later actual sale, a nonresident alien |
| Section 121 home-sale exclusion | Available if you lived there 2 of the past 5 years: $250K each, $500K for the couple | The IRS has not said whether it can apply to the deemed sale; this table assumes it can't and shows the figure if it can |
| 2026 exclusion ($910,000 per person) | Offsets only other appreciated assets still held on the expatriation date; none here, so it goes unused | Allocated in proportion to gain; here it all falls on the home, $1.82M for the two of you |
| Federal taxable gain (illustrative) | $2.5M; about $500K at 20% | About $1.18M, about $236K at 20%; if Section 121 stacks, about $680K and about $136K |
| California | Taxed as a resident on the $2.5M gain, roughly $280K | No explicit rule on whether the deemed sale is taxed; the later sale is California-source income reported on Form 540NR, and which basis applies needs a CPA to confirm |
| Withholding at closing | No FIRPTA; California Form 593 exemption available for a principal residence | None on the deemed sale; at the later sale, FIRPTA 15% is $750K and California's 3⅓% about $167K |
| Federal basis | Not applicable (the home is already sold) | Stepped up to the $5M market value on the deemed-sale date; a later sale at $5M has no federal gain |
| Effect on the net worth test | Sale proceeds count toward net worth on the expatriation date; you still cross $2M, and other assets are still deemed sold | The home counts at net equity |
| What to file, and when | Form 1040 and California Form 540 for the year of sale | Dual-status return plus Form 8854 for the expatriation year; Forms 1040-NR and 540NR for the year of the later sale |
Table assumptions: as in the paragraph above; the later sale is priced at $5M so the columns compare directly. Federal tax is estimated at the top 20% long-term capital gains rate, without the net investment income tax; California tax is estimated at FTB progressive rates with no other income. Selling commissions, closing costs and filings in China are not included. All figures are illustrative estimates, not any real transaction or tax bill.
What to remember: the $1.32M gap in federal taxable gain between A and B is exactly the two $910K exclusions ($1.82M) minus the $500K Section 121 exclusion that only A gets, and this example assumes the home is the only appreciated asset. For a family that also holds appreciated stock, including vested RSU shares, the exclusion goes against those assets under A as well, and B's advantage narrows. Once the couple's other gains exceed about $1.32M, A already costs less (assuming the deemed sale can't use Section 121; if it can, $1.82M). Above $1.82M, both paths use up the exclusion, and A keeps a Section 121 exclusion that is certain to apply. On California, B only postpones the state tax, and the basis question is unsettled. If California neither taxes the deemed sale nor recognizes the federal basis step-up, a later sale could be taxed on the full gain from the original $2M cost. By then you will most likely have been gone more than three years, and Section 121 won't apply. B also ties up cash: about $917K is held by the IRS and the FTB at closing until you file and settle, or obtain a withholding certificate in advance.
After expatriation: leaving the home or the proceeds to children in the U.S., and who pays the tax
Covered expatriate status has no expiry where gifts and bequests are concerned. The final Section 2801 regulations, issued in January 2025, apply to gifts and bequests received on or after January 1, 2025. When a child in the U.S. receives property from a covered expatriate, wherever the property sits and whether it was acquired before or after expatriation, it can be a covered gift or covered bequest. The child pays 40% on the amount above that year's $19,000 (the figure is $19,000 in both 2025 and 2026). The return is Form 708, under the December 2025 revision of the IRS instructions; gifts and bequests received in 2025 are due by June 15, 2027.
The home itself runs on a different track. After expatriation, it is U.S. real property held by a nonresident. Give it to your children during your lifetime and U.S. gift tax applies, with no lifetime exemption for a nonresident. Leave it at death and nonresident estate tax applies, with an exemption of only $60,000. Property on which gift or estate tax was timely reported generally is no longer a covered gift or bequest, so it isn't taxed a second time. If it wasn't timely reported, it falls into Section 2801, and your children pay. How gift tax works on a $5M home is covered in My Parents Live Overseas and the $5M Bay Area House Is in Their Names. If They Deed It to Me While I Work in the U.S., Will There Be a 40% Gift Tax? That article arrives at about $1.88M to $1.94M, depending on whether the home is in one name or split between spouses.
The biggest change is to cash. That article's third path, selling first, moving the proceeds abroad and then gifting cash, carries $0 of U.S. gift tax for ordinary nonresident parents. It doesn't work for a covered expatriate. Foreign cash given to a child in the U.S. is exactly the covered gift Section 2801 reaches. On $5M, your child would owe ($5,000,000 − $19,000) × 40% = $1,992,400, reduced by any gift or estate tax actually paid abroad. Both routes land near 40%. What changes is who pays: your children instead of you.
MK Group case: both timelines end in a sale run from a distance
Whichever timeline you take, the seller is usually no longer in the Bay Area by the time the deed is signed. Under A, the sale often runs alongside the move, timed to close before Form I-407 is filed. Under B, you sell after expatriating, from abroad and across time zones. How a sale gets done with the seller absent is illustrated by an $8M off-market sale MK Group completed in Atherton in July 2026 (anonymized, and unrelated to expatriation). The sellers had long lived outside the Bay Area. The house dated from the 1950s, and the interior, the pool and the grounds all needed work; on the public-listing path, preparation alone would have taken at least six weeks. Marie Wang (DRE# 02110980) and Kevin Mo (DRE# 02127623) read the lot, with its three points of access, as the source of value rather than the house. So there was no renovation and no listing: they went straight to a local developer buyer. The deal was agreed before listing preparation began. The sellers only had to fly back to sign, and the team coordinated the rest.
Placed on an expatriation timeline, the case points to three things:
- Decide first whether the value is in the land or the house, then decide who to sell to. With the right buyer type, you don't have to oversee a renovation remotely to get the home on the market, and the time saved goes straight to lining up your Form I-407 date.
- Under A, the date that matters is closing, not the day the price is agreed. Work backward from the date you plan to file Form I-407, leaving room for escrow, signatures and the funds to arrive.
- The extra steps under B all need to be in place before listing: confirming your status as a foreign seller, preparing the FIRPTA withholding certificate application, settling how California Form 593 will be calculated, and arranging remote signing and notarization.
Common mistakes
Mistake one: "The exit tax is for citizens who renounce. Handing back a green card doesn't count"
Section 877A applies to citizens who renounce and to long-term residents alike. Hold a green card in 8 of 15 tax years, and surrendering it is an expatriation, with the three tests, the deemed sale, the exclusion and Form 8854 all in play. And because years are counted by tax year, someone who has held the card for fewer than 8 full years may already have 8 tax years.
Mistake two: "If I haven't sold the house, there's no tax"
A deemed sale, by definition, doesn't require an actual sale. Every asset of a covered expatriate is treated as sold at market value the day before expatriation. The gain above the exclusion is included in income for the expatriation year and reported on that year's dual-status return. You can elect to defer that tax, but you must give the IRS adequate security, waive the relevant tax treaty rights and pay interest from the original due date. Everything is settled when the asset is sold or at death.
Mistake three: "Once I've left and stopped using the card, my status ends on its own"
For tax purposes, green card status ends only when it is revoked, or when an administrative or judicial process determines it has been abandoned. The Form 8854 instructions treat the date you file Form I-407 with a U.S. consular or immigration officer as the date of voluntary abandonment. Until you file, or abandonment is determined, you remain a U.S. resident for tax purposes, report worldwide income as usual, and keep adding years toward the 8. Leaving without filing Form I-407 doesn't avoid the exit tax. It hands the expatriation date to the immigration process, and until then you still report worldwide income as a resident.
Mistake four: "Keep the house through expatriation, and the $500K home-sale exclusion still applies"
The IRS hasn't given a clear answer. Section 877A(a)(2) applies "notwithstanding any other provision of this title." Neither Notice 2009-85 nor the Form 8854 instructions mention Section 121, and practitioners remain divided. Section 121 is certain only for an actual sale before expatriation that meets the 2-of-5-years test. When modeling B, assume it can't stack; whether to file as if it can is a call for your CPA.
Next steps
- Count your green card years and set the I-407 date. List, by tax year, the years you and your spouse each held a green card, and confirm whether either of you reaches 8 by the year you plan to expatriate. For any year in which you filed as a foreign resident under a tax treaty, have a CPA check year by year whether it can be excluded.
- Build a personal balance sheet as of the expatriation date. One for each spouse, on the Form 8854 basis, listing market value and cost for every asset. Have a licensed appraiser value the home, subtract the actual mortgage balance, and include retirement accounts, RSUs and stock options. This sheet decides three things: whether you cross the $2M line, how much appreciation you hold outside the home, and where the two $910K exclusions will land.
- Get the five years of compliance in order first. Check every federal income tax return for the past 5 years, the information returns for foreign accounts and assets, and the rental income and gift tax filings for any years the home was rented. If the compliance certification fails, the first two tests don't matter.
- Have a CPA put timelines A and B side by side. Carry each one through federal and California tax, whether Section 121 applies, the FIRPTA and Form 593 cash held back at a later sale, and filings in China. Put the expatriation-year filing deadline and Form 8854 on the same schedule.
- If the home or the proceeds will go to children in the U.S., see a cross-border estate attorney first. After expatriation, gift and estate tax on the home must be filed on time, and foreign cash gifts are taxed to your children under Section 2801. Decide who receives what, and in what form, before you set the Form I-407 date.
This article is for decision education and is not legal or tax advice. Confirm any action with your attorney, a U.S. CPA and a tax adviser in the country you are moving to. All figures are illustrative estimates under published rules. The average-tax threshold, the exclusion and the annual exclusion follow the figures the IRS publishes for each year; California's treatment of Section 877A follows FTB rules and your CPA's advice.