mralpen

I am considering a move to the USA, but for then next few years my wife will continue to live in the UK (she is studying) - we have arrangements that permit a fair bit of commuting each way.

Our mortgage in the UK is on the point of being paid off - it would run to term within the first couple of years of my residency in the USA, and various savings policies would be used to redeem the outstanding loan. In the UK, no additional taxes would be payable.

I have read some worrying threads here that suggest that I might be liable to tax in the USA on the capital gain since purchase if this happens. Is this true? Is it better to pay of the balance of the mortgage before becoming a US resident? Does it make any difference that my wife will be using it as her continuing principal residence?

dunroving

If it's an endowment policy (the "savings policies" you are referring to) you are talking about, paying off the mortgage won't change the maturity date of the policy, surely?

The weight of opinion and information in the various threads about this seem to indicate that you will be taxed on the profit on the "policies", i.e., maturity amount minus total payments. If you can find how much of the payments was the life insurance policy. some peopleseem to think this can reduce your tax bill in some way but I can only see this as increasing it (because the margin between savings payments and maturity amount would be greater).

mralpen

OK - thanks - that might just answer the question!

We've cashed in all our endowments already - they're sitting in an offset account just to zero out any interest on the remaining principal (we did this since we can't get a sensible savings return at the moment and this left us flexible liquidity). So it would be easy to simply cancel off the mortgage at any time - the only question is whether it's better to do this now whilst still UK resident, or whether the US tax authorities would care about this in April 2015. So if it's just the maturation of investment policies that are at issue, we don't have any of them to worry about - just a long-term loan that we could choose to pay off or not ...

nun

So it sounds was if you have already cashed in the endowment policies...that is good as it saves you having to worry about US taxes on them.

Paying off a mortgage is not a taxable event in either the US or the UK. The taxable event would be if you then sold the house and had a capital gain although there are exemptions a rules about whether the home is your primary residence.

mralpen

Perfect - thanks nun and dunroving.

sir_eccles

I'm guessing you'll have to declare those savings accounts on FBAR/FACTA.

From other threads, some mortgage lenders don't like having US resident borrowers. Having your wife still in the house may make things easier I don't know.

mralpen

OK - we'll have to let the lender know and see what they say. Thanks!

Cook_County

But according to the IRS, if there is a foreign currency gain on repaying the mortgage this would be taxable as ordinary income.

FatFrank

This is a great point that you kindly pointed out to me before Cook_County, and will hit me when I sell my UK house later this year. The exchange rate has noticeably changed between when I bought my house and took out the mortgage in the UK, when I moved to the US, and when I sell the house and pay off the remaining mortgage later this year. Somewhere in here will be a gain or loss that I will have to consider.......in my 2014 US return (and hopefully not my 2014-15 UK return)

Pulaski

But that would depend on the source of funds. Sure if it takes fewer dollars to pay off a loan than it would have taken to pay off the same loan at an earlier point in time (allowing for the regular payments), then, yes, there's a gain. But if you're using GBP funds to pay off a GBP loan, then whatever gain you make on the mortgage would be offset by the loss on the account/ asset, or vice versa.

Cook_County

Great theory - but not what the IRS say; now ... of course you could challenge the IRS position in District Court and you might win.

Pulaski

I suspect that most people complete their returns that way, usually out of ignorance, and given that an FX gain under these circumstances is virtually invisible (it is the difference between two numbers often several years apart), it is hard to even find unless you go looking for it. Which, of course, a tax audit might do.

Cook_County

IRS Revenue Ruling 90-79 states the IRS position. Ignoring the IRS interpretation of the law does not make it go away. A Supreme Court decision would; so if someone is lucky the Supreme Court will agree to hear the issue one day. In the meantime the choice is to run with the IRS or file an incomplete return or to state that one disagrees with the IRS on a Form 8275.

mralpen

Crumbs - I think I'm just going to clear it and have done with it - I don't like the idea of a vaporous cloud of auditability hovering in the air ...

durham_lad

If it is no financial hardship to pay off the mortgage before becoming a US resident it sounds like you will save yourself some concerns and complexity.

When sold our UK house after moving to the USA we had our taxes done by the company's tax pro's (Deloitte & Touche) since they had done our returns for the previous 4 years. I certainly don't recall any forex calculations on the mortgage we paid off. We did have to calculate capital gains, and were under the taxable limit for a primary home. (That was over 20 years ago and I have no idea what the rules were back then)