We are dual US/UK residents and have been resident in England for the past 10 years. In 2024 my wife cashed in her Roth IRA and bought 2 houses here in England and began renting them out in January 2025.

I am a little confused looking at the tax treaty, article 6 on rental income.

Is the rental income for 2025 taxed by the IRS as well as HMRC or is it only taxed by HMRC?

Quote:

ARTICLE 6

It looks like item 1 is talking about a different situaion to yours.
To me, it means that any rental from the US may be taxed in the US.
Is there not another article in the treaty that deals with real estate in the state that you are resident in?

Here is a link to the treaty, I don’t see an article dealing specifically with our situation.

https://assets.publishing.service.go...-_in_force.pdf


The technical explanation refers to article 7 which I think may say that the income is only taxed in the UK if the business/property and resident are both in the UK.

https://www.irs.gov/pub/irs-trty/uktech.pdf

My reading of Article 6 is that rental income is taxed based on the location of the property - which in this case would give primary taxing rights to HMRC, wouldn't it? However, since you are dual citizens, wouldn't you also be taxed by the IRS because the US taxes citizens on worldwide income? Maybe I'm over-simplifying.

The IRS doesn't necessarily tax US citizens on their worldwide income. For example my wife and I receive SS and that is taxed only in the UK so when I enter our SS benefits on the 1040 the taxable portion is zero. TurboTax did not support this and for us the taxable portion was always entered as 15% of our SS (e.g, if SS was $20,000, $3,000 would be taxable). I used to have to create an "other income" line with a negative value to zero out the erroneous taxable portion of SS. I did this for a couple of years until TurboTax recognized this error and started entering the taxable portion as zero.

Thanks for the clarification. I forgot about social security and I think there are a handful of other income sources not subject to the Saving clause in the tax treaty.

I cannot see anything in Article 6 of the treaty, or in the Technical Explanation that says tax would be liable in the US (though the Technical Explanation asserts that the State of residence does not have exclusive right).
In the absence of a specific statement of a US liability, should you not pay just the UK tax?
If, later on, the IRS claim that you should pay this tax, would there be any penalties over and above the payment of the tax?

Our daughter is also a USC living in the UK and she also has a rental property here. She also has much more complicated taxes and uses a dual qualified tax advisor. She let me look at her 2025 IRS return and it has all the calculations in Schedule E with the final profit listed at the end but the sum to be transferred to the 1040 is zero. This is similar to SS where our SS is reported fully on line 6a of the 1040 but the taxable amount in 6b is zero. She does pay UK tax on that rental income but obviously that tax cannot be claimed as a Foreign Tax Credit (FTC) in her IRS return.

I am going to do the same as I used to do with SS before TT allowed a zero value and create an "Other Income" entry titled to show that it is a reversal of the rental gain/loss as per the UK-US tax treaty.

Update from a tax pro:

”Not the treaty, no, it’s a US tax law thing. You can only deduct a rental loss against general income if you are a Real Estate professional. ”