Every American who calls me about a second citizenship eventually asks about renouncing outright, and almost every one of them has the same blind spot. They know an "exit tax" exists. Almost none of them know it treats an IRA as if it were fully cashed out the day before they left, taxed as ordinary income with no exclusion at all. And almost none of them know their house, the one asset everybody assumes is untouchable, gets folded into the same deemed sale as their stock portfolio, with the IRS never having said clearly whether the usual home-sale exclusion even applies to it. I'm not a US tax professional and don't pretend to be one, but I sit across from these families before and after that exact conversation with their accountant, and I've watched people budget for the wrong number because nobody walked them through IRC Section 877A before they had one foot out the door.
The short answer
The federal expatriation tax, IRC Section 877A, part of the 2008 HEART Act, only applies if you're a "covered expatriate": your net worth is $2 million or more, your average annual net US income tax over the prior five years exceeds $211,000 (the 2026 threshold), or you can't certify five years of clean tax compliance on Form 8854. If you're covered, the IRS treats your entire worldwide estate as sold at fair market value the day before you expatriate, taxing the net gain above a $910,000 exclusion (2026) at capital-gains rates. Your IRA doesn't get that treatment or that exclusion; it's deemed fully distributed as ordinary income, taxed immediately, though the 10% early-withdrawal penalty is waived. Your house is folded into the same deemed sale as everything else, at fair market value, with no explicit carve-out, and whether the familiar $250,000/$500,000 home-sale exclusion applies to that deemed sale is a question the statute, the IRS instructions, and Notice 2009-85 have never answered. For anyone with a paid-off house and a retirement account, this is the single most misunderstood part of the entire expatriation process.
Who actually becomes a "covered expatriate"
Three tests apply, and tripping any one is enough. This is where I see the first miscalculation, almost always from people who assume the exit tax is a billionaire's problem.
- Net worth of $2 million or more on your expatriation date. Never adjusted for inflation since 2008, and it counts everything: home equity, pension present value, every dollar in every IRA and 401(k). A professional couple with a paid-off house and a couple of retirement accounts can clear $2 million without feeling remotely wealthy.
- Average annual net income tax above $211,000 over the five prior years, up from $206,000 for 2025 and, unlike the net worth test, adjusted for inflation annually.
- Failing to certify five years of US tax compliance on Form 8854, under penalties of perjury, regardless of net worth.
Green card holders aren't exempt. Hold a green card in 8 of the last 15 tax years, with a single day in a year counting as a full year, and you're a "long-term resident" facing the identical exit tax on abandoning the card. There's a trap inside that trap: a long-term resident who elects treaty tie-breaker residency in another country on Form 8833 is treated as having terminated US residency, which can itself trigger the exit tax — one of the most frequently missed mechanics in this area of law.
A narrow exception covers dual citizens from birth who remain tax residents of their other country and spent 10 years or less of the last 15 as US residents, and minors who expatriate before age 18½ — though both still must certify five years of clean filings.
The deemed sale: what "mark-to-market" actually means
If you're covered, Section 877A treats all of your worldwide property as sold at fair market value the day before your expatriation date. Gains and losses land on your final return whether or not you actually sell anything.
The relief valve is a net gain exclusion — $910,000 for 2026, up from $890,000 in 2025 and $866,000 in 2024. Gain above it is taxed under normal asset rules: long-term capital gains at 0/15/20%, plus the 3.8% net investment income tax where it applies. For 2026, the 20% bracket starts above $545,500 of taxable income for single filers, $613,700 for married filing jointly.
Two mechanics soften the edges. Long-term residents who immigrated get a basis no lower than fair market value on the date they first became a US resident, electable out asset by asset. There's also a deferral election — tax on any deemed-sold asset pushed off until actual sale or death — but it's irrevocable, requires posting a bond or letter of credit, accrues interest, and requires waiving treaty rights that would block IRS collection. Few clients use it once they see what it costs to keep.
Your IRA gets emptied on paper, with no exclusion
Here's the part that catches people who've done real planning everywhere else. IRAs, HSAs, Archer MSAs, Coverdell accounts, 529 plans, and ABLE accounts are all "specified tax-deferred accounts" under the statute. A covered expatriate is treated as receiving a full distribution of the entire balance the day before expatriation, taxed as ordinary income at ordinary rates, not capital gains rates. That income isn't sheltered by the $910,000 exclusion at all, because that exclusion only applies to gain on a deemed sale of property — a retirement account gets a deemed distribution instead, an entirely different bucket of the tax code. The one relief: the usual 10% early-withdrawal penalty doesn't apply, whatever your age.
Employer pensions and 401(k)s get a more forgiving framework as "deferred compensation items." A plan with a US payor where you file Form W-8CE — commonly within 30 days, though some tax attorneys argue only Notice 2009-85, not the statute, sets that deadline — is "eligible": not deemed distributed, but every future payout suffers flat 30% US withholding, plus a waiver of any treaty right to reduce it. An "ineligible" plan (foreign payor, or no timely W-8CE) gets the harsher treatment: the present value of the entire accrued benefit is deemed received the day before expatriation and taxed immediately, vested or not.
Your house: the deemed sale nobody warns you about
This surprises people most, because a primary residence feels categorically different from a stock portfolio. Under the statute it isn't — your principal residence, US or foreign, is included in the deemed sale at fair market value, with no carve-out written into the law.
What happens next is genuinely unsettled, and I want to be precise rather than pretend there's a clean answer, because plenty of guides simply assert one side or the other. The normal Section 121 exclusion lets a homeowner exclude $250,000 of gain ($500,000 married filing jointly) on a home sale. Whether it applies to the deemed sale under the exit tax is a real, live question. IRC 121(e) denies the exclusion where the old pre-2008 expatriation rules applied; Section 877A separately says the deemed gain is taken into account "notwithstanding any other provision" of the tax code — language some read as replacing the home exclusion with the exit tax's own $910,000 exclusion, others read as simply establishing a deemed sale, leaving 121 free to apply on top. Neither Form 8854, its instructions, nor Notice 2009-85 — still, as of 2026, the only substantive guidance on this regime — takes a position either way.
Given that uncertainty, the standard, conservative move I hear from tax counsel most often: sell the house before you expatriate, while Section 121 unambiguously applies, rather than gamble on an unresolved question.
There's a mirror-image trap for people who don't sell before leaving: selling later as a nonresident can cost the Section 121 exclusion entirely if you no longer meet the two-of-five-year ownership-and-use test, and a nonresident selling US real estate runs into FIRPTA withholding at closing — the standard rate is 15% of the sale price, dropping to 10% for a sale between $300,000 and $1 million to a buyer who intends to use the property as a residence, and waived entirely under $300,000 on that same residence test — refundable only after filing a US return.
Section 2801: the 40% tax your US heirs inherit (Form 708)
Form 8854 must be filed with your final return; getting it wrong, or not filing it, carries a $10,000 penalty absent reasonable cause, on top of any tax owed.
The bigger tail is Section 2801, sometimes called the "revenge tax," and it's the newest piece of this regime to actually have teeth. Any US person who later receives a gift or bequest from a covered expatriate owes a 40% tax on the amount above a $19,000 annual exclusion (2025), and the tax falls on the recipient, not the person who expatriated. Final regulations weren't published until January 14, 2025, but apply retroactively to transfers received on or after January 1, 2025, closing a 16-year gap in which the tax existed on paper but had never been enforced. A new Form 708 handles reporting; for 2025 gifts it's due June 15, 2027, with a six-month extension available. Transfers to a US-citizen spouse and to charity are excluded.
The context that makes this sting: the regular US estate and gift exemption is $15 million per person for 2026, made permanent by the One Big Beautiful Bill Act. Covered expatriates' US heirs get none of that shelter — only the $19,000 annual exclusion before 40% applies. For a family with US-resident children or grandchildren, that's a permanent, hereditary cost outliving the person who left.
One narrow escape hatch: the IRS runs a standing Relief Procedure for non-willful former citizens with net worth under $2 million and aggregate US tax liability of $25,000 or less across the expatriation year and five prior years — file six years of returns, owe nothing. Citizens only, not green card holders, and built for modest accidental Americans, not professionals who trip $2 million on paper wealth alone.
Why this is a live conversation again in 2026
The State Department cut the fee to renounce US citizenship from $2,350 to $450, effective April 13, 2026, reversing a 2014 increase and citing the cost burden on Americans abroad. It's a real change for people already planning to renounce, and it changes nothing about the exit tax itself. Cheaper paperwork alongside unchanged, arguably more scrutinized substance is exactly the gap that catches people off guard. Renunciation numbers were already trending up beforehand — up from a few hundred a year before 2010 to a peak of roughly 6,700 in 2020, and elevated in the years since — though every source hedges those totals differently and the lists run six to eighteen months behind actual filings.
Where this fits into the bigger decision
None of this argues against renouncing for the people it genuinely suits — I've written separately about when renouncing US citizenship actually makes sense, and it's a smaller list of profiles than most assume. What every American client should understand before that conversation starts is that the exit tax isn't one flat number — it's three calculations stacked together: capital gain against a $910,000 exclusion, ordinary income on the entire IRA with no exclusion, and a house whose treatment turns on an unresolved question of law most advisors won't flag unless asked directly.
For the overwhelming majority of my clients, none of this applies, because they're adding a second citizenship as insurance while keeping the US passport they already have. Puerto Rico's Act 60 changes your tax picture without triggering any of this, since you never expatriate. Citizenship by investment programs, the kind I work on out of my office at Four Seasons Nevis, are mobility and a Plan B, not a US tax event — you can hold St Kitts and Nevis citizenship for life and never come near Section 877A, because acquiring it doesn't touch your US status at all. Only the smaller number who go on to actually renounce, usually years later for entirely separate reasons, need to think about any of this — which is exactly why I tell people to bring in proper advisory and tax counsel the moment renunciation becomes real, not after a deemed sale has already priced in the wrong number.
Key takeaways
- The exit tax only applies to "covered expatriates" — net worth of $2M+, average annual US tax above $211,000 (2026), or a failed five-year compliance certification on Form 8854.
- Worldwide property is deemed sold at fair market value the day before expatriation, with gain above a $910,000 exclusion (2026) taxed at capital gains rates.
- Your IRA is treated completely differently: deemed fully distributed as ordinary income, with no exclusion at all, though the 10% early-withdrawal penalty is waived.
- Your house enters the same deemed sale at fair market value, and whether the usual home-sale exclusion applies to it remains genuinely unresolved in law — sell before you leave for certainty.
- The tail doesn't end at expatriation: Form 8854 penalties and a 40% "revenge tax" under Section 2801 on anything US heirs later receive make this a decision with permanent, hereditary consequences.
Frequently asked questions
Does the exit tax apply to everyone who renounces US citizenship? No. It only applies to "covered expatriates": net worth of $2 million or more, average annual US income tax above $211,000 (2026) over the prior five years, or a failed five-year compliance certification. Trip none of those tests and there's no exit tax.
Is my IRA covered by the $910,000 exit tax exclusion? No. IRAs and similar accounts are deemed fully distributed as ordinary income the day before expatriation, and that income sits outside the $910,000 mark-to-market exclusion entirely, since that exclusion only applies to capital gain on a deemed sale. The 10% early-withdrawal penalty doesn't apply to this deemed distribution.
Does the home-sale exclusion apply to my house under the exit tax? It's genuinely unresolved. The statute includes your principal residence in the deemed sale at fair market value with no explicit carve-out, and neither the IRS instructions nor Notice 2009-85 says whether the normal Section 121 exclusion applies. The common planning approach is to sell the home before expatriating, where the exclusion clearly applies.
What happens to my kids if I die as a covered expatriate? Under IRC Section 2801, any US person who later receives a gift or bequest from you owes a 40% tax on the amount above a $19,000 annual exclusion, and that liability falls on the recipient, not your estate. Final regulations only took effect for transfers received on or after January 1, 2025.
Does getting a second citizenship by itself trigger the exit tax? No. Acquiring a second citizenship has no effect on your US tax status, because you haven't given up US citizenship or long-term residency. The exit tax only applies when you actually expatriate.
