texasbound

So how does the treatment work if there has been payments off the mortgage capital made is it is not an interest only mortgage.

Let's say you took out a UK mortgage in 2008 (strong ex rate) for £400k - ($800k)

In the intervening years your regular payments bring this down to £250k

Finally you move to the U.S. and decide to sell in 2015, so you are making mortgage repayment of £250k but the ex rate in now down to 1.55

Am I right to assume you have tax to pay on the ex rate difference (2 to 1.55) on the £250k?

Thanks

theOAP

I still find it odd, in the case of Jaag, that the tax advisor is applying the 988 regulation without question. Technically, they are right to do so since Jaag is a US person at the time of repaying the foreign mortgage; but did Jaag secure a "foreign" mortgage years ago on the offhand possibility of some day in the future moving to the US; and is it logical they would wait until they arrived in the US to repay the mortgage just to put one over on the US tax man? Logic breaks down in this case. There is an unofficial non-IRS approved term - "selective compliance". I'll say no more. This may be what Cook County was referring to when they mentioned "a position not to calculate the tax but disclose to the IRS".

Since Jaag was not a US resident at the time of securing the mortgage years ago, and had only been a US resident for 3 months before repaying the mortgage, logic is defeated but the regulation stands. If someone has been resident in the US for years, and continues to hold a foreign mortgage, then the application of the regulation is more believable.

I don't know. Was the re-mortgaging a variation of the original contract (original contract remains but at a new value), or was the original contract dissolved and a new contract (for a new value) initiated? If the former, I would question a taxable event; if the latter, I would say yes, the re-mortgaging was a taxable event (closure of the original mortgage). I could well be very wrong on this.

Capital repayments do count. If, at the time of repayment, a loss is established, one may wish to stop there.

If, at the time of repayment, a gain is made, then one may wish to establish the original mortgage amount (L); calculate the most advantageous exchange rate at the time of each individual capital portion of each monthly repayment (P), and subtract the total of the calculations as the repayment amount (R).

L - (P1 + P2 + P3 +P4 + .....et al) = R

This method utilises all the variable exchange rates in existence during the period of the mortgage and would give a much more accurate result.

Some additional reading:
How is the Sale of a Foreign Personal Residence Taxed in the US? | Maxim Global Wealth Advisors

US Expat Taxes: Buying and Selling Real Estate Abroad

Saving Taxes with Currency Exchanges and Section 988 | International Tax Counselors Blog

To Sell or Not to Sell a Principal Residence � Are Your Assignees Covered?

Beckyb

This is a problem I may have to come but with a slight difference. My UK property is a rental and will have a section 1231 loss. I'm assuming I can apply my mortgage "gain" against this loss as both are deemed ordinary income?

FatFrank

Looks like paractically everyone, including me, who bought a UK house in 2001 and has subsequently sold it is going to get hit with this currency fluctuation mortgage tax. ...the exchange rate has not been as low as it was in 2001 since then.

...and there was me moaning about the exchange rate dropping back in the last couple of months thinking it was all bad news. If my house sale goes through and the exchange rate this year remains lower than it was in 2014, then I will have less profit in USD but at least I will pay less tax on the mortgage repayment. I'm sure I'd still be better overal with the sale if the rate was up at 2:1 but at least there is some sort of benefit with the exchange being as low as it is right now.

F

LotusEater33

Just realized.
I took a secured loan out against the property.

How would that affect me?

theOAP

IMHO, reporting a 988 transaction is a bit like filing Form 3520 or 3520-A (Foreign Trusts). There are times when it definitely should be filed, and times when the IRS will probably be less concerned whether it was filed or not. It's up to individual circumstances and if the filer (or, as in the OP, a tax advisor) establishes that due to the circumstances, it is indeed necessary.

At times, a grey area.

MsElui

We were warned when we came over. We didnt realize the depth of the tax hit though. Had we realized how huge it would have been we would have done something about it. I would add though - my husbands salary has increased nearly 100% since we arrived - and pushed us into new brackets AND the tax adviser we have now said their were some tax law changes in the last year or two that is going to make it MORE difficult for us.
so we would not have had a 'realistic' estimate back in 2007 when we arrived, as we didn't know the laws would change (not in our favor) we would be in such different salary range, and what possible gain we would have made when we sold (as we didnt know when we were going to sell and for how much). I'm just eternally grateful i inquired with the advisor before it got spent so we could hold back a large portion of the money to pay the bill (or that could have been a VERY nasty disaster!). we should know in the next month how bad its going to be and if we saved enough.

jb82

If you arrived in sept you are resident from September and would be hit by the phantom gain. You would do a dual status return. Or am I missing something here?

FatFrank

Wait, have I got this the wrong way around?
If the, exchange rate is higher when you sold the house in 2014 than it was in 2001, then it would take more dollars to pay of the mortgage than it would have, and there is no currency gain...?

.....this is actually making my head hurt LOL

jb82

it is bad if the exchange rate falls between when you took out the mortgage and subsequently paid it off. That is when you have to pay the phantom tax.

A higher rate when you sell is good as there is no gain.