Another scenario:<p>US Citizen living and working abroad buys a house for X in local currency. Later sells same house for the same amount X in local currency. That local currency has appreciated by 20% against USD in the timeframe. And the IRS computes capital gains in USD, not in local currency.<p>Net result: the seller owes IRS &quot;capital gains&quot; taxes on 20% of the value of a house that was bought and sold for the same price.