Expatriation Mark-to-Market Exit Tax Example

Expatriation Mark-to-Market Exit Tax Example

Expatriation Mark-to-Market Exit Tax Example: Our Attorneys summarize the expatriation mark-to-market exit tax Example, as provided in Notice 2009-45.

When it comes to expatriation, a common question we receive is about applying the IRS exit tax exclusion re: IRC 877A, to the unrealized gains and losses.

As provided in Notice 2009-45:

  • “After allocating the appropriate amount of the exclusion amount among the gain assets, the covered expatriate must report gains and losses on the appropriate Schedules and Forms depending upon the character of each asset. Losses may be taken into account only to the extent permitted by the Code, except that the wash sale rules of section 1091 do not apply. Thus, for example, losses are subject to the limitations of section 1211(b).”

Expatriation Mark-to-Market Exit Tax Example

Let’s walk through the example provided in Notice 2009-45:

Example 1. A, a covered expatriate, relinquished his citizenship on November 1, 2009. On October 31, 2009:

A owned three (3) assets:

 

  • Asset X: As of October 31, 2009, Asset X had a fair market value of $2,000,000 and an adjusted basis of $200,000

 

  • Asset Y had a fair market value of $1,000,000 and an adjusted basis of $800,000, and

 

  • Asset Z had a fair market value of $500,000 and an adjusted basis of $800,000.

 

How is this Expatriate Mark-to-Market Exit Tax Example Calculated?

A (covered expatriate) must allocate the exclusion amount to each gain asset as follows:

Step 1. Determine the built-in gain or loss of each asset by subtracting the asset’s adjusted basis from the fair market value of the asset on October 31, 2009.

Adjusted BasisFMVBuilt-in Gain/(Loss)
Asset X$200,000$2,000,000$1,800,000
Asset Y$800,000$1,000,000$200,000
Asset Z$800,000$500,000($300,000)

 

Applying the Exit Tax Exclusion 

In the above referenced example, two (2) of the properties are gain properties, and one of the properties is a loss property.

For the year of the example, the exclusion amount was $626,000, so we will use that number as well, so if you refer back to the example the IRS used, it will all make sense.

Asset  X: $800,00 Gain

The gain is $1,800,000. Therefore, the gain of $1,800,000 is multiplied by the exclusion amount of $626,000. The resulting exclusion is $563,400.

Asset Y: $200,00 Gain

The gain is $200,00. Therefore, the gain of $200,000 is multiplied by the exclusion amount of $626,000. The resulting exclusion is $62,600.

*The total exclusion for Asset X & Asset Y is the maximum allowed ($626,000)

Asset Z: Loss Property

No Gain, so no exclusion is applied.

Calculation:

Asset X:

  • Mark-to-Market Gain of 1,800,000
  • Exclusion Amount: 563,400
    • Result: $1,236,600 is included in taxable exit tax income

Asset Y

  • Mark-to-Market Gain of 200,000
  • Exclusion Amount: 62,600
    • Result: $137,400 is included in taxable exit tax income

 

The income is included as the type of gain it represents during the “phantom sale.” So, if for example the income is Short-Term Capital Gain (STCG) then it is taxed at the covered expatriate’s progressive tax rate, If it is long-term, than the LTCG rules would apply at a 15% or 20% tax rate (under current tax laws)

The Loss from Asset Z is also included (subject to some limitations).

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