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1031 Exchange on UK property

1031 Exchange on UK property

Old Jul 28th 2020, 10:37 am
  #1  
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Default 1031 Exchange on UK property

Hi All

Trying to get some decent answers on 1031 exchange for UK-UK property
- US tax resident since 2010 and GC since 2014 , likely getting citizenship given already within period of being a 'covered expat' per IRS
- bought home in 2005 for approx 220K, current value around 500K
- thinking about selling in the UK and doing a part exchange
- property has been rented since 2008
- mortgage on property for approx 200K interest only for last 10 years
my assumptions
- won't pay any capital gains in the UK as I am a non-resident
- and the value of the property has decreased since 2015 when capital gains started to be calculated for non-residents.
- won't pay anything to IRS as doing a part exchange

other idea is we potentially move to the UK for a year or two once we get US citizenship and nominate the above as our primary residence and use the $500K waiver filing jointly to not pay Capital gains to the US but not sure on this one

Queries
- is the above correct? Or does the fact we have rented out the property trigger something else in the UK/ HMRC?
- does having a mortgage impact the part exchange, as I know if we sold it the mortgage is an issue in so much the exchange rate has moved fairly significantly in the last 10 years and the US/ IRS treat this as a taxable gain.

Anything else? And I guess who is an expert in these areas should we proceed as my calls to a few UK lawyers suggests I have more understadning than they.
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Old Jul 28th 2020, 4:31 pm
  #2  
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Default Re: 1031 Exchange on UK property

Is the first line a typo, are you doing the 1031 for another investment property in the UK of equal or greater value or did you mean in the US? If you plan is to buy in the US and convert it to use as your primary residence I recall there is a 5 year hold period. I would get a RE Attorny to look at this give the possible sums involved.
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Old Jul 28th 2020, 5:01 pm
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Default Re: 1031 Exchange on UK property

correct UK-UK equal or greater value , home is central and likely getting something further out , you cannot do a UK-US exchange as that is not a like kind exchange .
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Old Jul 28th 2020, 5:47 pm
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Default Re: 1031 Exchange on UK property

Originally Posted by ajlondon View Post
.... my assumptions
- won't pay any capital gains in the UK as I am a non-resident ...
Wrong.

"You have to pay tax on gains you make on property and land in the UK even if you’re non-resident for tax purposes"
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Old Jul 28th 2020, 5:52 pm
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Default Re: 1031 Exchange on UK property

can you show me where this is wrong? As per HMRC (I can't post links it seems) though copied some of the relevant info below. I am using the market value as of 2015 and there has been zero gain since 2015 (it has actually declined)

Calculate your gain or loss for UK residential property

There are 3 ways to calculate your gain or loss:
  • using the market value at 5 April 2015
  • by working out the gain over the whole period (the date the property was acquired to the date it was disposed of) and then working out what the gain since 5 April 2015 is as a proportion – known as time apportionment
  • by working out the gain over the whole period

Rebasing from 2015

For disposals of UK residential properties by non-residents where you owned the property before 6 April 2015 the standard approach for calculating the gain is to use the market value at 5 April 2015.
  1. Establish the value of your property as of 5 April 2015 (known as ‘rebasing’).
  2. Work out the difference between the value on 5 April 2015 and the value when you disposed of the property.
  3. Deduct any costs of improving the property (enhancement costs) incurred from 5 April 2015 and the legal cost of selling the property (incidental disposal costs).
You can use the market value at 5 April 2015 (rebase) to calculate your gain or loss if you made a disposal of UK residential property after 5 April 2015 if you:
  • were either non-resident or during the overseas part of a split year
  • you meet the temporary non-residence rules

Example of the rebasing method for residential properties

Rebasing computation – gain from 5 April 2015 to disposal:
  • date of acquisition – 5 January 2011
  • acquisition costs – £500,000
  • date of disposal – 6 June 2016
Disposal proceeds £1,250,000 Incidental disposal costs £30,000 Net disposal proceeds £1,220,000 Market value at 5 April 2015 £1,000,000 Enhancement costs £0 Total cost £1,000,000 Gain over period from 5 April 2015 to disposal
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Old Jul 28th 2020, 6:02 pm
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Default Re: 1031 Exchange on UK property

Originally Posted by ajlondon View Post
can you show me where this is wrong? As per HMRC (I can't post links it seems) though copied some of the relevant info below. I am using the market value as of 2015 and there has been zero gain since 2015 (it has actually declined)

Calculate your gain or loss for UK residential property

There are 3 ways to calculate your gain or loss:
  • using the market value at 5 April 2015
  • by working out the gain over the whole period (the date the property was acquired to the date it was disposed of) and then working out what the gain since 5 April 2015 is as a proportion – known as time apportionment
  • by working out the gain over the whole period

Rebasing from 2015

For disposals of UK residential properties by non-residents where you owned the property before 6 April 2015 the standard approach for calculating the gain is to use the market value at 5 April 2015.
  1. Establish the value of your property as of 5 April 2015 (known as ‘rebasing’).
  2. Work out the difference between the value on 5 April 2015 and the value when you disposed of the property.
  3. Deduct any costs of improving the property (enhancement costs) incurred from 5 April 2015 and the legal cost of selling the property (incidental disposal costs).
You can use the market value at 5 April 2015 (rebase) to calculate your gain or loss if you made a disposal of UK residential property after 5 April 2015 if you:
  • were either non-resident or during the overseas part of a split year
  • you meet the temporary non-residence rules

Example of the rebasing method for residential properties

Rebasing computation – gain from 5 April 2015 to disposal:
  • date of acquisition – 5 January 2011
  • acquisition costs – £500,000
  • date of disposal – 6 June 2016
Disposal proceeds £1,250,000 Incidental disposal costs £30,000 Net disposal proceeds £1,220,000 Market value at 5 April 2015 £1,000,000 Enhancement costs £0 Total cost £1,000,000 Gain over period from 5 April 2015 to disposal
Are you saying that you won't pay CGT on your specific transaction? ..... I was addressing your apparent assertion that you won't be liable for CGT merely because you are outside the UJK. ..... If it is in fact the latter, my hyperlink should help.
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Old Jul 28th 2020, 6:06 pm
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Default Re: 1031 Exchange on UK property

when I put the first post together I had the link , but wouldn't post and i felt enough context with dates would have helped given the 2015 date is crucial in this calculation;
thus you concur I won't pay ? thankyou.
This is the link as i have now past 5 posts https://www.gov.uk/guidance/capital-...e-gain-or-loss
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Old Jul 28th 2020, 6:25 pm
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Default Re: 1031 Exchange on UK property

Originally Posted by ajlondon View Post
..... thus you concur I won't pay ? thankyou. ....
I haven't tried to analyze your transaction, I was only addressing your apparent assertion that you won't be liable for CGT merely because you are outside the UK.
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Old Jul 28th 2020, 8:42 pm
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Default Re: 1031 Exchange on UK property

Originally Posted by ajlondon View Post
other idea is we potentially move to the UK for a year or two once we get US citizenship and nominate the above as our primary residence and use the $500K waiver filing jointly to not pay Capital gains to the US but not sure on this one
According to what a CPA once told me, eg suppose you lived there 2 years before selling, and had rented out for 8 years, you'd only get a 20% exemption (2/(2+8) x $500,000). You'd also have to pay tax on all the depreciation while renting. The CPA was talking about US exchanges, and I don't know if he was correct.
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Old Aug 4th 2020, 10:53 am
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Default Re: 1031 Exchange on UK property

in case anyone needs to follow up the answer is yes provided you are non-resident CGT can be avoided in the UK https://www.gov.uk/guidance/capital-...e-gain-or-loss just use this calculator to get the answer ,generally you can rebase the property value to 2015. Then you need to assess if your country of residence would tax you or in the case of the USA you can use 1031 exchange to defer the gain
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