If you’re a US citizen living in Japan and considering renouncing your citizenship — or a long-term resident (green card holder) thinking about terminating your US resident status — you need to understand the exit tax before you act.
Under IRC Section 877A (applicable to expatriations on or after June 17, 2008), the US imposes a mark-to-market regime on certain individuals who expatriate. If you are classified as a covered expatriate, the IRS treats you as having sold most of your worldwide property at fair market value the day before your expatriation date. The resulting unrealized gains — above an exclusion amount — may be taxable even though no actual sale took place. A pre-June 17, 2008 expatriation may be subject to the prior rules under Section 877.
This article is general information and is not tax, legal, or accounting advice. Expatriation has significant legal and tax consequences. Consult a qualified tax professional and, if applicable, an immigration attorney before taking any action.
Who Is Subject to the Exit Tax?
The exit tax provisions apply to:
- US citizens who renounce their citizenship
- Long-term residents (LTR) who terminate their US resident status — a long-term resident is a lawful permanent resident (green card holder) who has held that status in at least 8 of the last 15 tax years
For the LTR 8-of-15 calculation, certain years may not count if the individual was treated as a tax resident of another country under a treaty and did not waive treaty benefits, subject to the applicable rules and notice requirements. Termination of LTR status for tax purposes can occur through formal abandonment (Form I-407), administrative or judicial determination, or in certain cases where a dual resident invokes treaty residency — identify the specific termination event under Section 7701(b)(6) and the Form 8854 instructions.
Not all expatriates are subject to the exit tax. The mark-to-market deemed sale and related rules apply only to covered expatriates. However, all expatriating individuals must file Form 8854.
Source: IRS — Expatriation Tax | IRS — Instructions for Form 8854
What Makes You a “Covered Expatriate”?
You are a covered expatriate if you meet any one of the following three tests:
1. Net Worth Test
Your net worth is $2 million or more on the date of expatriation.
2. Average Annual Net Income Tax Liability Test
Your average annual net income tax liability for the 5 tax years preceding expatriation exceeds the applicable amount. For expatriation in calendar year 2026, this threshold is $211,000 (adjusted annually for inflation).
3. Tax Compliance Certification Test
You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 tax years preceding expatriation. This certification covers Title 26 obligations — income tax, employment tax, gift tax, required information returns (Forms 5471, 8621, 8938, etc.), and payment of all taxes, interest, and penalties due.
Note: The FBAR is a Title 31 obligation, not Title 26. FBAR non-filing alone may not cause failure of this specific certification test, but FBAR obligations should still be resolved, and certain compliance programs (such as Streamlined Procedures) require FBAR filing. The relationship between FBAR and a particular compliance procedure must be analyzed separately.
Exceptions for Certain Dual Citizens and Minors
Certain individuals who meet the net-worth or average-tax-liability tests may nonetheless not be treated as covered expatriates under limited exceptions:
- Certain dual citizens at birth: individuals who were citizens of both the US and another country at birth, who at expatriation remain citizens and tax residents of that other country, and whose US residency during the 15 tax years ending with the expatriation year was 10 years or less
- Certain minors: individuals who expatriate before age 18½ and whose US residency before expatriation was 10 tax years or less
These exceptions do not waive the requirement to file Form 8854 and certify 5 years of federal tax compliance. The requirements are detailed; consult the Form 8854 instructions for the precise definitions.
Source: IRS — Instructions for Form 8854 | IRS — Rev. Proc. 2025-32 (2026 Inflation Adjustments)
How the Exit Tax Works: Mark-to-Market Deemed Sale
If you are a covered expatriate, you are treated as having sold most of your worldwide property interests at fair market value on the day before your expatriation date. This is a deemed sale — no actual transaction occurs, but gain or loss is recognized for tax purposes. Property excluded from the general mark-to-market rule (deferred compensation items, specified tax-deferred accounts, and interests in nongrantor trusts) is subject to separate rules described below.
The Exclusion Amount
A portion of net gain from the deemed sale is excluded. For expatriation in calendar year 2026, the exclusion amount is $910,000 (adjusted annually for inflation).
The exclusion is allocated among all gain properties in proportion to each property’s built-in gain. It is not applied to loss properties and cannot exceed any single property’s gain. Only net gain exceeding the allocated exclusion is subject to tax. Deemed losses are recognized only to the extent otherwise allowable under the Code (for example, losses on personal-use property are generally not deductible).
What Property Is Included?
The deemed sale applies to virtually all worldwide property interests not subject to the special rules, including:
- Stocks and securities (US and Japanese)
- Real estate (including Japanese property and personal residence)
- Business interests (including KK or GK ownership)
- Cash, personal property, and other assets
Special Rules for Certain Property
Eligible deferred compensation items — items that meet the requirements of Section 877A(d)(1), which depend on the payor’s status, plan characteristics, and other conditions — not solely on the plan type. If the covered expatriate irrevocably waives treaty withholding benefits and timely files Form W-8CE with the payor (generally within 30 days after the expatriation date or before the first distribution, whichever is earlier), taxable payments are subject to 30% withholding.
Ineligible deferred compensation items — items that do not meet the eligible requirements. The present value of the accrued benefit as of the day before expatriation is treated as received on that date, resulting in immediate income recognition.
Specified tax-deferred accounts (such as IRAs and certain retirement accounts) — the entire interest in the account is treated as distributed on the day before expatriation.
Interests in nongrantor trusts — special rules generally apply a 30% withholding on the taxable portion of future distributions to the covered expatriate.
The treatment of Japanese pension accounts (National Pension, Employees’ Pension, iDeCo, corporate DC) under these categories depends on their classification under the IRC Section 877A rules — professional analysis is required.
Basis and Currency Considerations
For naturalized citizens or long-term residents, a minimum basis rule may apply, generally using the fair market value of property at the time US residency began. An irrevocable election to not use this minimum basis is available. For assets denominated in yen, both the basis and the fair market value must be determined in US dollars, and exchange rate changes can affect the gain calculation.
Source: IRS — Expatriation Tax | IRS — About Form W-8CE
Section 2801: Tax on Gifts and Bequests from Covered Expatriates
A significant long-term consequence of becoming a covered expatriate: under Section 2801, certain gifts or bequests from a covered expatriate to US citizens or US residents (determined under the transfer-tax domicile standard, which differs from income-tax residency), as well as certain domestic and electing foreign trusts, are subject to a transfer tax — imposed on the US recipient, not the covered expatriate.
- The tax rate is the highest estate tax rate in effect at the time of receipt (currently 40%)
- The Section 2801(c) annual exclusion amount is $19,000 for 2025 and 2026
- Certain exceptions and adjustments for foreign transfer taxes may apply
- The US recipient reports and pays the tax on Form 708
This means that even after expatriation, your covered expatriate status can impose a tax burden on US recipients (as defined under Section 2801) for gifts or inheritances they receive from you.
Source: IRS — Instructions for Form 708
Form 8854
All expatriating individuals — whether or not they are covered expatriates — must file Form 8854 (Initial and Annual Expatriation Statement).
Initial Filing
- Filed for the year of expatriation, attached to your applicable income tax return (Form 1040, 1040-NR, etc.) by its due date. If you have no return filing obligation, file Form 8854 by the due date your return would have been due, following the instructions for the filing address
- Used to determine whether you are a covered expatriate (the three tests plus exceptions)
- Reports the mark-to-market deemed sale results if you are a covered expatriate — deemed gains and losses are also reported on the applicable forms and schedules (Form 8949, Schedule D, Form 4797, etc.) as if actual sales occurred
- Includes your certification of tax compliance for the prior 5 years
Annual Filing
Covered expatriates who reported any of the following may need to file Form 8854 annually:
- A deferral of mark-to-market tax (by posting adequate security)
- An eligible deferred compensation item
- An interest in a nongrantor trust
Penalty for Failure to File
Failure to file a complete and accurate Form 8854 in any required year may result in a $10,000 penalty per year, unless reasonable cause and not willful neglect is demonstrated. Additionally, failure to provide the required certification on the initial Form 8854 can result in being treated as a covered expatriate.
Source: IRS — About Form 8854 | IRS — Instructions for Form 8854
Practical Considerations for Americans in Japan
Japanese Real Estate
If you own property in Japan, the fair market value of that property is included in the mark-to-market deemed sale. Your gain is the difference between the fair market value and your adjusted basis (in US dollars). The $910,000 exclusion is allocated pro rata among all gain properties — it does not apply in full to any single asset. Obtaining an accurate appraisal of Japanese real estate is essential.
Japanese Company Ownership
If you own a Japanese KK or GK, the fair market value of your ownership interest is included. Valuing a closely held foreign company requires professional appraisal and involves questions of US entity classification, as discussed in our Form 5471 article.
Japanese Pension and Retirement Accounts
The treatment of Japanese pension interests (National Pension, Employees’ Pension, iDeCo, corporate DC) under the exit tax depends on whether they are classified as eligible deferred compensation items, ineligible deferred compensation items, specified tax-deferred accounts, or something else under the Section 877A rules. This classification determines whether the mark-to-market rule, the 30% withholding rule, immediate income recognition, or another provision applies. Professional analysis is required.
Tax Treaty Considerations
Treaty effects and statutory waiver rules vary by asset and income category. Do not assume that the treaty overrides Section 877A or that no treaty provision can ever be relevant. Eligible deferred compensation and deferral elections involve explicit treaty-waiver requirements. The interaction is complex and depends on the specific asset, income type, and applicable treaty article.
Japan’s Exit Tax (国外転出時課税)
Japan has had its own exit tax system since July 2015 (国外転出時課税制度). It generally applies to certain residents who meet conditions including:
- Hold qualifying assets (securities, investment trusts, derivatives, etc.) with a total value of ¥100 million or more at the time of departure
- Had a domicile or residence in Japan for more than 5 years within the 10 years preceding departure
Renouncing US citizenship or surrendering a green card does not itself constitute departure from Japan. However, if you plan to leave Japan around the same time, the Japanese exit tax may apply to your qualifying assets independently of the US exit tax. Coordinate with both US and Japanese tax professionals.
Source: 国税庁 — 国外転出時課税制度
Alternatives and Planning Considerations
Before expatriating, consider whether the benefits outweigh the costs:
- Get compliant first — If you have unfiled returns or information returns, resolve them before expatriating. Failing the compliance certification makes you a covered expatriate regardless of your net worth. Options may include the Streamlined Filing Compliance Procedures, Relief Procedures for Certain Former Citizens, or other approaches depending on your facts — consult a tax professional to determine the appropriate program
- Understand Section 2801 — If you become a covered expatriate, future gifts and bequests to US recipients as defined under Section 2801 may be subject to tax payable by the recipient. Factor this into your long-term planning
- Evaluate unrealized gains — If you would be a covered expatriate, calculate your estimated deemed-sale gain across all property. If your total net gain falls within the $910,000 exclusion (allocated pro rata), the actual exit tax may be limited
- Consider deferral — Covered expatriates may elect to defer the exit tax on certain property by posting adequate security (a bond or other collateral) with the IRS. Interest accrues on the deferred tax
Frequently Asked Questions
I’m a green card holder who has lived in Japan for 10 years. Am I subject to the exit tax?
If you held your green card in at least 8 of the last 15 tax years and you meet any one of the three covered expatriate tests, you may be subject to the exit tax when you formally terminate your LPR status. Simply living abroad generally does not end LPR status for US tax purposes — identify the specific termination event under Section 7701(b)(6) and the Form 8854 instructions.
My net worth is under $2 million. Am I safe?
Not necessarily. You are a covered expatriate if you meet any one of the three tests. Even if your net worth is below $2 million, you may be covered if your average annual net income tax liability exceeds $211,000 (for 2026) or if you cannot certify full tax compliance for the prior 5 years.
Do I pay exit tax on my Japanese house?
If you are a covered expatriate, the fair market value of your Japanese real estate is included in the mark-to-market deemed sale. Your gain is the difference between fair market value and your adjusted basis (in US dollars). The $910,000 exclusion is allocated pro rata among all gain properties — it does not apply in full to the house alone.
What if I’ve already renounced and didn’t file Form 8854?
Consult a tax professional immediately. Failure to file Form 8854 may result in $10,000 annual penalties and can affect your covered expatriate determination. Limited late-filing guidance may be available depending on the facts, including FAQ 24 on the IRS Relief Procedures for Certain Former Citizens page. FAQ 24 has specific tax-compliance, threshold, and reasonable-cause requirements and is not a general amnesty. The Relief Procedures for Certain Former Citizens program may also apply in certain cases.
Next Steps
- US Tax Filing Obligations — The complete overview
- FBAR Filing — Get compliant before expatriating
- Form 5471 — If you own a Japanese company
- PFICs and Form 8621 — Resolve PFIC issues before expatriating
- Streamlined Filing — How to catch up if you haven’t been filing (coming soon)
