Deemed Disposal Tax: Who Owes It, Form 8854, and Deferral

A deemed disposal tax treats you as if you sold an asset at its fair market value even though no sale actually took place, and then taxes the resulting gain. In U.S. federal law, the main version of this rule is the expatriation exit tax under Section 877A of the Internal Revenue Code, which treats certain people who renounce citizenship or end long-term residency as having sold all of their worldwide property on the day before they leave.¹ For 2026, the first $910,000 of that deemed gain is excluded from tax.²

Who Actually Owes the U.S. Exit Tax

The exit tax reaches only “covered expatriates.” You become one by meeting any single one of three tests:

Your net worth is $2 million or more on the date you expatriate. This threshold is fixed and is not adjusted for inflation.
Your average annual net income tax for the five years ending before your expatriation date exceeds an inflation-adjusted threshold. The 2025 figure is $206,000, and it moves up each year.²
You cannot certify that you have been in full compliance with all federal tax obligations for the five taxable years before expatriation.

One test is enough. The compliance test in particular catches people who fall below the dollar thresholds but have unfiled returns or unpaid liabilities in the background.

How the Tax Is Calculated

If you are a covered expatriate, Section 877A treats every asset you own worldwide as sold at fair market value on the day before your expatriation date.¹ The net gain from that deemed sale is added to your income for the year and taxed like any other capital gain.

The exclusion applies to net gains across your entire portfolio, not per asset. Its base amount was $600,000 in 2008, indexed for inflation each year, and it reaches $910,000 for 2026.² If your deemed sale produces $1.5 million in total gain, only $590,000 remains taxable after the exclusion.

The exclusion stacks on top of other provisions that already reduce gain. For a principal residence that qualifies for the Section 121 home-sale exclusion (up to $250,000 for a single filer or $500,000 for a married couple filing jointly), Section 121 reduces the gain first, and the $910,000 expatriation exclusion then applies to whatever is left.³

Your gain on each item is fair market value minus your adjusted basis. Adjusted basis starts with what you originally paid, then increases for capital improvements and decreases for items such as depreciation.⁴ If you cannot substantiate your basis, the IRS may treat it as zero, which turns the full fair market value into taxable gain. Old closing statements, brokerage confirmations, renovation receipts, and depreciation records suddenly matter a great deal.

Retirement Accounts and Deferred Compensation

Retirement accounts and deferred compensation are not exempt, but they do not go through the mark-to-market process. They are handled under separate rules that can be harsher.

Specified tax-deferred accounts such as IRAs are treated as if the entire balance were distributed to you the day before you expatriate. The full account value becomes taxable income in that year, with no mark-to-market exclusion softening the result. Eligible deferred compensation items, including certain employer pension plans, face a 30 percent withholding tax on future payments made to the covered expatriate.¹

Someone with a large IRA can face a substantial unexpected bill in the expatriation year, layered on top of gains from other property. This is one of the easiest pieces of the calculation to overlook.

Valuing Your Assets

The whole calculation depends on fair market value on the day before expatriation, meaning the price a willing buyer and willing seller would agree on with full information and no pressure to act.⁵ Publicly traded securities are straightforward: use the closing price. Private business interests, real estate partnerships, collectibles, and intellectual property need professional appraisals.

The IRS imposes a 20 percent accuracy-related penalty on the portion of any underpayment caused by a substantial valuation misstatement, and the penalty doubles to 40 percent for a gross misstatement, defined as a reported value that is 200 percent or more off from the correct amount.⁶⁷ A documented appraisal from a qualified professional is the best defense.

Filing Form 8854

Covered expatriates report the exit tax on IRS Form 8854, the Initial and Annual Expatriation Statement. The form asks you to list every asset with its fair market value on the day before expatriation and your adjusted basis, then calculate gain or loss item by item.⁸ It also requires a balance sheet of assets and liabilities as of the expatriation date and disclosure of your citizenship or immigration history.⁹

You file Form 8854 with your income tax return for the year that includes your expatriation date, by the normal filing deadline for that return, including extensions.⁸

Deferring the Tax Payment

If you cannot pay the bill immediately, Section 877A lets you make an irrevocable election to defer payment on a property-by-property basis. Deferral runs until you actually sell the asset, or, for property disposed of in non-recognition transactions, until a date the IRS specifies.¹

Before the deferral takes effect, you must post adequate security. Acceptable options include a bond meeting the requirements of Section 6325 or another form of collateral the IRS approves, such as a letter of credit.⁸ If the security falls short and you do not fix it in the time the IRS allows, the deferral terminates and the full amount comes due.

Interest accrues on the deferred amount from the original due date of the return at the standard underpayment rate, compounded daily.¹⁰ Over several years, the running interest can add up, so deferral is most useful when your assets are illiquid rather than as a general cash-management strategy.

What U.S. Law Does Not Treat as a Deemed Disposal

People often assume the concept sweeps in gifts, inheritances, or converting a home to a rental. Under U.S. federal tax law, none of these produces a deemed sale.

A lifetime gift of appreciated property carries your basis over to the recipient under Section 1015; no tax is owed at the moment of the gift.¹¹ At death, inherited property takes a basis equal to its fair market value on the date of death under Section 1014, so the appreciation that built up during the decedent’s lifetime is never taxed as income.¹²

Converting a personal residence to a rental is also not a taxable event. Your basis for computing depreciation becomes the lesser of your adjusted basis or fair market value on the date of the conversion, and the tax consequences show up later, when you sell. Depreciation you claim while the property is a rental gets recaptured at a rate of up to 25 percent when you sell, and that recapture cannot be offset by the Section 121 home-sale exclusion.¹³

Deemed Disposal in Other Countries

Deemed disposal rules exist elsewhere and often reach further than the U.S. version. Canada imposes a departure tax on residents who emigrate, treating their worldwide property as sold at fair market value on the departure date, and it also applies deemed disposition at death, taxing unrealized gains on the decedent’s final return.¹⁴ Ireland requires holders of certain funds and ETFs to pay tax on accumulated gains every eight years, whether or not the investment has been sold. The United Kingdom treats gifts as disposals at market value for capital gains tax, so the giver can owe tax on the gain even though nothing came back in return.¹⁵

If you hold assets across borders or are weighing a change of residency, a deemed disposal in one country may or may not affect your obligations in another, and treaty provisions can sometimes relieve double taxation on the same gain. That interaction is where planning gets complicated, and it is worth working through before an expatriation or emigration date locks the numbers in.

1
Office of the Law Revision Counsel. 26 USC 877A – Tax Responsibilities of Expatriation
2
Internal Revenue Service. Expatriation Tax
3
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain from Sale of Principal Residence
4
Internal Revenue Service. Topic No 703 – Basis of Assets
5
Internal Revenue Service. Publication 561 – Determining the Value of Donated Property
6
Internal Revenue Service. 2013 Annual Report to Congress – Volume One
7
Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
8
Internal Revenue Service. Instructions for Form 8854
9
Internal Revenue Service. Form 8854 – Initial and Annual Expatriation Statement
10
Internal Revenue Service. Notice 2009-85
11
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
12
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent
13
Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets
14
Canada Revenue Agency. Taxable Capital Gains on Property, Investments, and Belongings
15
GOV.UK. Capital Gains Tax – Gifts to Your Spouse or Charity