The recent Bruyea court decision dealt a serious blow to Americans living abroad who seek to avoid double taxation. But the decision may not be the end of the story.
Americans living overseas face a particularly frustrating tax problem. Even when they pay substantial income taxes in their country of residence, they may still be subject to the additional 3.8% U.S. Net Investment Income Tax (NIIT) under Internal Revenue Code Section 1411.
Unlike regular U.S. income taxes, the NIIT generally cannot be offset by foreign tax credits under the Internal Revenue Code. This can result in double taxation, even when the foreign country has already imposed a higher income tax on the same gain.
On August 31, 2026, the U.S. Court of Appeals for the Federal Circuit ruled in Estate of Bruyea v. United States that the U.S.–Canada income tax treaty did not permit a foreign tax credit to offset the 3.8% NIIT.
The taxpayer, an American citizen residing in Canada, had sold Canadian real estate and paid Canadian income tax on the gain. Nevertheless, the IRS imposed the additional 3.8% NIIT.
The court concluded that the relevant treaty provisions did not override the limitations imposed by U.S. domestic tax law.
The decision was disappointing for Americans abroad who had hoped that income tax treaties would protect them against this form of double taxation.
But does Bruyea mean that Americans living abroad have no way to avoid the 3.8% NIIT? Not necessarily.
The United States has income tax treaties with dozens of countries, including Israel, the United Kingdom, Germany, France, and Canada.
These treaties are not identical.
While Bruyea rejected a foreign tax credit under the U.S.–Canada treaty, and a companion decision reached a similar conclusion under the U.S.–France treaty, other treaty provisions and factual circumstances may present different legal arguments.
The precise language of the applicable treaty, the nature of the income, and the taxpayer’s circumstances can all be important.
Depending on the treaty and the facts, there may still be arguments for reducing or eliminating the NIIT. Such arguments require careful examination and should not be assumed to succeed merely because a different treaty applies.
There is another important issue that is often overlooked.
Not every capital gain is necessarily subject to the 3.8% Net Investment Income Tax.
For example, U.S. tax law distinguishes between passive investments and certain active business activities.
Under appropriate circumstances, gains associated with an active business—including certain real estate activities—may fall outside the definition of net investment income.
The distinction can be significant.
An American selling foreign investment real estate, an interest in a foreign business, or other appreciated property should not automatically assume that the entire gain is subject to NIIT.
Whether an exclusion applies depends on the taxpayer’s actual activities, participation, ownership structure, and other factors. Simply owning or managing rental property does not automatically qualify.
The Bruyea decision is important. It must be taken seriously.
However, taxpayers and their advisers should distinguish between two separate questions:
Can foreign tax credits offset the NIIT under a particular income tax treaty?
Is the taxpayer’s income or capital gain subject to NIIT in the first place?
These questions involve different legal analyses and potentially different solutions.
For Americans abroad facing substantial capital gains, the financial consequences can be considerable.
A $2 million gain potentially subject to NIIT could produce an additional $76,000 in U.S. tax, assuming the entire gain is subject to the 3.8% tax.
That is a significant amount to pay without first examining the available legal alternatives.
The Federal Circuit’s decision in Bruyea has narrowed an important avenue for claiming foreign tax credits against NIIT.
But it has not eliminated every possible treaty-based argument, statutory exclusion, or other avenue for relief.
Americans living abroad who are selling foreign real estate, businesses, or substantial investments should carefully examine their NIIT exposure before concluding that the additional 3.8% tax is unavoidable.
The applicable tax treaty, the nature of the investment, and the specific facts may make a substantial difference.
Monte Silver is a U.S. international tax attorney based in Israel, advising Americans abroad on complex U.S. tax matters, foreign tax credits, tax treaties, and international taxatio
