Jamesrush394

Hi everyone - my wife and I are due to relocate to NYC in the coming months but wanted to see if someone had any advice regarding property that we own in the UK. We have been residing away from the UK for the past 3-years, in which we have rented our home in the UK and would like to continue to do so whilst we're in the US. Would we be liable for any US tax on our rental income back in the UK or would that still fall under UK tax jurisdiction?

Any help or direction would be much appreciated!

Glasgow Girl

The UK has the first right to tax your UK rental income but you will also will be liable to US tax on the same income. The US will allow a credit of any UK tax paid, meaning that if the UK tax paid is more than that due in the US you will have nothing additional pay in the US, but if the US tax is more than the UK tax then you will have to pay the difference. Either way you have to report the income on your US tax return. The expenses and depreciation (which you must take) in the US are typically more generous than in the UK so there is a good chance there will be no additional tax to pay, unless that is your only U.K. income in which case the UK tax free allowances may mean that you pay very little tax in the UK.

christmasoompa

Just to add to Glasgow Girl's excellent (as always) answer, I'd also add that you should look in to Capital Gains Tax - it can be much higher in the US than in the UK, so perhaps something else to factor in just in case you did stay in the US and decide you wanted to sell.

Good luck with the move.

Jamesrush394

That's very kind, thank you both for the info. I'll speak to our accountant to make sure everything is above board!

crawshaws

I'm in a similar situation...but 25 years further down the road than the OP. I retained a rental property in the UK when I left in 1994. Over the last many years in the USA I have been declaring my rental income and paying USA tax on it (only US tax - I'm non-domicile in the UK so I don't pay UK tax). Having said that, I've paid very little tax on that rental income. I've been deducting expenses, e.g. mortgage interest, maintenance, management expenses AND depreciation. The depreciation under the US MARC rules typically reduces my annual net profit to close to zero. This rental property makes filling out my annual US tax return a little bit more complicated, but I can still manage it myself with Turbo Tax Premium. So 30 years on, I've made very little profit out of my UK rental, but it is paid off and it's value has grown significantly over the years. I plan to hold on to the property for a few more years, but when I do sell I'm sure I'll have to pay some US capital gains tax (unless I were to roll it into a US rental property).

Glasgow Girl

If by rolling the UK rental property into a US rental property you mean doing a 1031 exchange then be aware that the process is limited to US - US properties or international - international properties, you cannot exchange an international property for a US property or vice versa.

Also, the depreciation taken will be recaptured upon sale by deducting it from the cost basis. Capital gains will be calculated using that new cost basis. All gains up to the amount of the depreciation that was recaptured will be treated as ordinary income and taxed at your marginal tax rate, but capped at 25%. Normal capital gains will apply to any remaining gain. Depreciation on rental properties is great on a year by year basis, but really bites when the property is sold. Unfortunately you must take the depreciation annually because you will be taxed on it upon sale regardless of whether you took it or not. Something to budget for when the time comes.

crawshaws

Thank you Glasgow_Girl for clarifying that a UK-US 1031 exchange isn't possible. I wasn't planning to do a 1031 (I'm at the point where I'm trying to simplify my financial affairs), but good to know that decision is already made for me. At some point I'll sell the property and give up some significant percentage of the proceeds in tax. Fair enough. As you say, I just need to plan accordingly.

Pulaski

If you wait until you're retired before you sell, you might be able to juggle your finances to save a significant amount of tax, i.e, make sure you have sufficent taxed, liquid savings that can be used to live on for an entire tax year without generating much taxable income, so "savings in the bank", or running up credit card/ personal loan debt, and then avoid drawing pension income to have minimal taxable income (apart from bank interest and any stock dividends) so as to bring your marginal income taxe rate down as low as possible. Only you can decide whether the tax saving is enough to make the planning effort, and possible loan interest, worthwhile.

I am sceptical that the state income tax saving would be worth temporarily establishing residence in a low/ zero income tax state would be worthwhile unless you were already planning a move there anyway, and could postpone the sale until after you had moved (or selling sooner if you are planning a move from a low/ zero income tax state).

crawshaws

Good thoughts Pulaski - some, but not all, had occurred to me. I will be living off "savings in the bank" for a few years, those might be good years to liquidate this asset and minimize income tax. They'll also be good pre-age-65 years to pay very little for health insurance through the ACA, I'll weight the benefits. As you say, more radical moves might also make sense...but probably not worth the grief for my relatively modest UK property value. Thanks!

Teela_Brown

Following on from posts on this thread for those of you that have rentals in the UK, what are the factors that make you consider selling, and why do you keep them?
We left the UK on a temporary assignment in 2005 expecting to move back and rented our property brought in 2000.
Circumstances meant we haven't yet moved back and its seems less likely as time goes on (at least in the medium term).
We have a property manager for the house and have done every repair required as requested however the house is very dated, still has 70s/80s bathrooms etc. We just replaced the boiler and last year did roof repairs and a chimney repoint, I see more repairs down the road, it's been almost 20 yrs. We always held on to it in case we went back but at what point to you call it a day and sell? I know we will get hit with capital gains but there's no avoiding that unless we sell up here and return which is unlikely. We are probably 12-15 years from retirement.

crawshaws

Per Glasgow Girl above (who knows a thing or two!) - you'll likely pay ordinary US income tax (at your marginal rate) on the proceeds from the sale (above the depreciated cost basis), capped at 25%. I don't know your circumstances, but it seems like the worst case is you'll pay up to 25% on the money you make on the sale. If the UK property isn't cash flowing all that well and you have big repairs coming up, that doesn't seem like such a huge hit to me...but that's your decision.

Glasgow Girl

The amount of recaptured depreciation is what will be taxed at ordinary income rates capped at 25%, any reminaing gains will be taxed at normal capital gains rates.

Going back to the question as to when to call it a day. For me, the property had been rented for 10 years and like you I had kept up with all repairs. It was reasonably up to date when first rented, but 10 years as a rental will take its toll, and it needed a major refresh. New paint and flooring as a minimum, fresh landscaping, new kitchen and bathrooms at the other end of the scale. When a tenant who had occupied the house for 5 years moved on, I decided that if I had to pay to to refresh the property I might as well get out of it at that point, because another few years of renting would mean incurring that expense all over again before selling and so significantly reducing the ROI. I also realized that the chances of me going back to live in the UK were small, and if I did I would almost certainly sell and buy a different property anyway. I did like having property as part of my investment strategy and so took the proceeds and invested in rental properties over here which I self manage. Turned out to be a great investment, and funds a very early retirement. But in a nutshell although it was my home when I left and I loved the house, over time it became nothing more than an investment, and the combination of a sellers market and ongoing and future expenses meant there were better returns to be had by selling. I have never looked back, if I ever return to the UK (unlikely) I can buy a new property. The returns in the stock market and US rentals are at least as good as that to be had renting out UK property, and IMO a lot higher.

crawshaws

Ah, thanks for that correction Glasgow Girl...and for that summary of your rental property sell/hold decision tree. My UK rental has had the same tenant for 25 years and they are very "low maintenance". For that reason I've continued to hold, despite having no intensions of returning to the UK. Having said that, another factor that is looming into the sell/hold decision is wanting to avoid leaving my wife or my heirs with a foreign asset high tax mess to deal with on my death. Since getting advice on this forum, I've decided to pick an opportune year (a low income year) in the next few years to sell my UK property. Yes, I'll pay some tax, but I'll have a pile of tax-paid dollars in the US to spend as I like...or leave behind hassle-free.

Pulaski

Something to bear in mind, especially if the tax bill is large and you don't actually need the capital, is that you/ your heirs would save the CGT if you left them the house, rather than selling and leaving them cash/ other assets, as inheritances are received at a "stepped up basis", meaning at market value.

So if you're concerned about the potential "mess" of leaving a UK home to your heirs, you should have a conversation with a local solicitor (an established firm, that is likely to still be around when you die), about setting up the procedures for a smooth transfer of the home to your heirs and arrangements for selling it if that is what your heirs choose to do with it.

Teela_Brown

This is great insight, thanks everyone.

I agree i don’t have the emotional attachment to the home I first had, it is now just an asset in the UK, but also still feels somewhat of a safety net.

It has never been empty we’ve had no problem getting tenants, Mortgage is long gone and the rent funds our UK bank account making trips home easy with funds available. It generates about 900gbp a month. Current lease is for the next 9 months the house is probably worth around/not more than 400,000 gbp purchased for 125000 in 2000.

So i guess i have to figure out if we should sell when current renters don’t renew and how to invest the proceedings.