Most departing residents know about the §877A exit tax. Almost nobody knows about the rule that punishes coming back too soon. IRC §7701(b)(10) and Treas. Reg. §301.7701(b)-5 tax a former resident alien who resumes U.S. residency within roughly three years under the §877(b) expatriate regime for the gap years in between, recharacterizing gains that would have been tax-free to a nonresident, and the regulation says motive is irrelevant. The classic casualty: sell appreciated U.S. stock during the nonresident gap, return the following year, and discover the "tax-free" sale was not.
If you were a U.S. resident alien for three consecutive calendar years (183+ residence days each), became a nonresident, and resume U.S. residency before the close of the third calendar year after your residency termination date, the intervening nonresident years are retaxed under §877(b) whenever that exceeds the normal §871 nonresident tax, which pulls gains on U.S.-corporation stock and U.S. debt back into the U.S. tax net.
Treas. Reg. §301.7701(b)-5(a) imposes the rule, expressly "regardless of whether the individual has a tax avoidance motive," when all four conditions are met.
| # | Condition | Source |
|---|---|---|
| 1 | Resident alien for at least three consecutive calendar years (the initial residency period) | Reg. §301.7701(b)-5(a)(1) |
| 2 | The period of residence in each of those three years includes at least 183 days | Reg. §301.7701(b)-5(a)(2) |
| 3 | The individual is then taxed as a nonresident, including a treaty tie-breaker nonresident under Reg. §301.7701(b)-7(a)(1) | Reg. §301.7701(b)-5(a)(3) |
| 4 | The individual becomes a U.S. resident again before the close of the third calendar year beginning after the residency termination date | Reg. §301.7701(b)-5(a)(4) |
Condition 3 deserves a second read. Claiming nonresident status on Form 8833 under a treaty tie-breaker counts as ceasing residence for this rule, so a treaty position followed by a return within the window walks directly into §877(b) treatment for the treaty years.
For each intervening year, the tax is computed under the graduated rates of §1 or §55 on a gross income base expanded by the §877(d) source rules, and applies only if it exceeds the ordinary §871 nonresident tax for that year. The expansion is the trap. Items treated as U.S.-source for this purpose include gains on the sale of property located in the United States, gains on the sale of stock issued by domestic corporations and debt obligations of U.S. persons (§877(d)(1)(B)), and income or gain from a foreign corporation in which the individual held more than 50 percent of vote or value within the lookback, to the extent of pre-departure earnings (§877(d)(1)(C)). Property whose basis carries over from tainted property stays tainted. Under normal §871 rules, a nonresident not present 183 days pays zero U.S. tax on gains from U.S.-corporation stock; under §877(b), those gains are taxed at full graduated rates with capital gain character preserved.
The window runs through the close of the third calendar year beginning after the residency termination date. Terminate residency at any point in 2026 and the window covers 2027, 2028, and 2029; the first safe re-entry day is January 1, 2030. The regulation's own example confirms the counting: a residency termination on August 1 of year one keeps a return as late as October of year four inside the trap.
The arithmetic: $600,000 multiplied by the 20 percent top capital gains rate is $120,000; the precise liability follows the full §877(b) computation for 2028. Returning eight months early converted a tax-free sale into a six-figure bill.
The HEART Act's §877(h) turns off §877 for anyone whose expatriation date under §877A(g)(3) is on or after June 17, 2008, but only citizens and long-term residents (green card in at least 8 of the prior 15 years) have an expatriation date at all. Verified law: the regulation remains in the current CFR, and a substantial-presence resident or a short-tenure green card holder has no §877A(g)(3) expatriation date, so §877(h) by its terms does not reach them and the re-entry rule applies in full. Labeled as unsettled: for a long-term resident who terminated after June 16, 2008, §877A governs the exit itself, and how §877(h) interacts with the §7701(b)(10) cross-reference for that person's gap years has no direct authority on point; treat any position there as requiring case-specific analysis.
| Profile | Exit tax (§877A) | Re-entry rule (§7701(b)(10)) |
|---|---|---|
| Substantial-presence resident, 3+ consecutive years | No (not a long-term resident) | Yes - fully applies |
| Green card held under 8 of 15 years | No | Yes - fully applies |
| Long-term resident terminating after June 16, 2008 | Yes, if covered expatriate | Interaction unsettled - analyze case by case |