southernspeed

We moved here from England in March 2016. My wife is on an L1A and I'm here L2.
On her first tax return, not a complete year, she was charged tax on our house we sold in the UK.
We bought the house over 3 years before moving here. We both lived and worked in the UK only. The house was sold and mortgage all paid off before we came here. The tax company (KPMG) says that we have to pay gains tax on it regardless.
Does this sound right to you? I really can't see what it has to do with the IRS ??
Thanks for any info. Mark.

md95065

There isn't enough information in your post to be able to give a useful answer.

Go and read this - https://www.irs.gov/individuals/inte...d-ending-dates - and come back and tell us what your "residency start date" in 2016 was, and when you completed the sale of your house in the UK.

southernspeed

Our residency started 27th Feb, house sale completed the day before.

md95065

OK, so you didn't set foot in the US in 2016 until Feb 27, and your house sale completed on Feb 26, 2016, and it had been your principal residence for the last 3 years?

That seems to me to be something that happened outside the US before you became resident for tax purposes and should, therefore, be of no concern to the IRS.

Even if it did need to be reported to the IRS you should be eligible for an exclusion of up to $250,000 each on any gain from the sale. Changes in exchange rates could also mean that the IRS will regard you as having made a "gain" when you paid off the mortgage.

Presumably KPMG advised you that something needed to be reported to the IRS regarding the home sale and you ended up paying tax on it - what exactly was it that was reported and taxed and what did they say when you asked them why that was the case?

southernspeed

They had all the details I've just given here, and they said we had to pay tax because of the exchange rate. But, the difference between the purchase price and sale price was only £110,000 and we had spent £30k on improvements which weren't taken into consideration for some reason.

md95065

Sounds like you made a "gain" on the mortgage when you paid it off because of changes in the exchange rate during the time that you had the mortgage and that is what you ended up paying tax on. It still seems to me that, if that "gain" was realized before you became resident for US tax purposes then you shouldn't need to report it to the IRS, but you were cutting it really fine by completing that transaction the day before you arrived. If, somewhere in the paperwork, there is a statement that shows a settlement date that is on or after Feb 17, then there could be an issue.

southernspeed

Thank you very much for your input. This is how we feel too. We are wondering if KPMG have filed us as being here for the whole tax year (they did say it was very complicated to do a partial year) so the house sale was wrongly taken into consideration. It's reassuring to hear someone backing up our own thoughts on it so we will pursue it further. All of her EU colleagues have had substantial rebates (all in very similar situations) yet she got a very substantial tax bill (after all the estimated tax had been taken at source).
Thanks again.

md95065

It's really not at all complicated to do a partial year return and, even if it were, it should be well within the capabilities of KPMG to do so.

southernspeed

Well, the guy who was dealing with us doesn't work there any more, take from that what you will !
Are you a professional in the tax world? We are considering getting last years returns looked over to see what's gone on and where we stand. You can PM me if so.

md95065

Nope - I am not a tax professional and there are others on here who know much more about the subtle details of US taxes than I do so it is possible that there is something going on here that I either don't know or don't understand but it seems to me that KPMG may have screwed up and, considering how much they are probably charging your wife's employer for their services I am really surprised that they appear to have been unable to provide you with a satisfactory explanation as to why they believed that this tax needed to be paid. They should have been able to give you a step by step explanation of the factual basis for their opinion.

southernspeed

OK thank you. And yes, I concur re: KPMG. We'll be taking this further.

Cook_County

It will have been KPMG India who prepared your return if your employer paid. Do bear in mind that KPMG may have done what saved your employer the most money, rather than you, as you are not the client who paid their bill.

Steve_

The answer to your question (and KPMG should know this, amazed that they don't) is that you should file dual-status for 2016. This is essentially two tax returns, a 1040NR for the first part of the year and a pro-rated 1040 for the second part of the year. TaxACT can do them. Instructions in IRS publication 519. The 2011 edition has a step-by-step example of how to complete one.

So your house transaction would not be covered by US taxes as you didn't live in the US when you sold it.

The fact that you are in a non-immigrant status has no bearing on your tax status, you are a resident alien for tax purposes. As is explained in publication 519 at great length.

https://www.irs.gov/pub/irs-pdf/p519.pdf

Bear in mind the relevant tax treaty provisions, Article 4 of the relevant tax treaty usually renders the substantial presence test moot.

JimmyArtnull

I agree with this. I moved here on April 1st and my accountant filed a dual status return which meant all my earnings from the UK for Jan-Mar were not considered for my US taxes. I think KPMG might have screwed you and you would be best to go back to them and ask why they were so negligent and not working with the interest of their client (you).

neill

I agree, and I did a dual status return on my first year, really not hard even for a non-tax guru to figure out.

The 1040NR should be marked DUAL STATUS STATEMENT, as should the 1040.