jimakos

I called a few "International/Expat Tax experts" today and none of them knew about mortgage/loan forex gains. They also said why would I even report such a thing.

I find it terrible that I would have to pay someone to prepare my taxes, and then I have to explain to them how to do it.

kodokan

Doesn't surprise me in the least. When one of the Big Four accounting firms did our first year taxes and sent the 'finished' copy to be signed, they'd:

- completely missed off Form 8938

- missed a small overpayment we'd made to our HSA (payroll hadn't allowed for employer contribution, and I didn't know enough in Year One to keep an eye out and catch it before year-end). When I queried it, they basically shrugged and said yeah, you just have to declare that and pay interest/ tax, no way to fix it, etc, which is a total fabrication (you can back it out, along with a proportional amount of any interest it has earned, and add it back into your taxable income for that year). I can't imagine how tedious it would've been going forward to have a few hundred dollars in the HSA with a different tax basis to the rest.

- included a bunch of small but annoying typos and inaccuracies (which must've taken some effort, given we input all the info ourselves into their fact finder Turbotax-a-like software and it was correct when I sent it).

I feel much more confident about the two returns I've prepared myself using Turbotax, frankly, and one of those included working out the tax on exercising stock options.

theOAP

It's called a Section 988 gain.

Foreign mortgage exchange rate gain « Tax Advisory Partnership

jimakos

I've read that over and over .
Still not sure how its reported, how capital payments are calculated, what constitutes a mortgage refinance (e.g if i changed my terms (new rate) paid a fee but kept the same account with remaining balance and remaining term, is that a refinance?). A refinance seems to mean that i could use the FX rate on the refinancing date which for me makes a significant difference

kodokan

I think Americans would view that as refinancing, wouldn't they? It's what they call it when they move to a new, lower interest rate, regardless of whether it's with the same provider.

I suppose it's like the the loan reverse equivalent of buying 100 shares in a mutual fund, selling them, then buying them back the same day. You still own the same assets from a common sense point of view, but you've actually bought different ones and reset the basis.

Wouldn't it be the same with mortgages? Somewhere in the background, if you refinance to a new interest rate, the old loan has to be 'repaid' against the old planned income payment stream, and then recalculated/ amortized out with the new interest rate.

It sounds like one of those desperately arcane areas where no one really knows anyway, including everyone working in the industry, so you can make a judgment call and be prepared to argue the toss with back up paperwork if challenged. It's not like they'd throw you in prison.

theOAP

IMHO, go with what you feel meets the spirit of the 988 rule. If you feel refinancing is a repurchasing of the property with an all new mortgage, go with that.

Someone posted a similar problem about a year ago. As a result of a new hire package, the US new company engaged one of the Big 4 accounting firms to do the first year tax return. They went with a 988 gain and it cost the individual big bucks. With the current Holy Crusade by the IRS/Congress against anything financially 'foreign', it seemed more of a CYA move on the part of the accountants.

IMHO, (repeat, IMHO), the whole scam in the case of a person newly arrived in the country is opportunistic legalised extortion.

kodokan

You'd have to be audited, get an agent who understood to look for the FX capital gain in the first place, and THEN get one who thought to check whether the mortgage date was for some unknown reason different to the one on the bit of paper you signed when it 'started'.

I'd like those odds, personally, and would consider that declaring a gain over the length of the current mortgage, rather than a previous, fully paid-up one, was a reasonable approach to law-abiding compliance (while spitting about the snake-like inequity of the whole affair, of course).

kodokan

You wouldn't even need to doublethink that the property was 'repurchased', according to the tax experts link above:

"Under the US law predating section 988, the borrowing and repayment of the mortgage loan is a separate transaction from the purchase and sale of the personal residence."

If you think you genuinely changed from one mortgage to another, you're good to go. I'd be very comfortable persuading myself that re-signing a new set of docs with a new rate, for which they probably rechecked income and so on, was in fact a completely new financial transaction.

jimakos

Good reasoning. Now the real question is how/where is it reported and how to get an accurate calculation.
There are alot of people here that say they had to pay but none say how it was calculated in any detail

kodokan

This article explains where to record the gain using Turbotax: How to Report a Forex Profit in TurboTax | Finance - Zacks (The interweb generally says stick it on Line 21 of the 1040.)

Dunno how to do the calculation, though. All the examples I've just read (I got curious about this whole thing) take the simple path of saying 'imagine it's an interest only mortgage'. I take it yours wasn't..?

I'm now imagining a scenario where you have to take each principal repayment, every month, and calculate the FX gain on it individually, as a tiny percentage of the original transaction. Hmmm... that could be helpful, depending on how much of it you repaid before becoming US resident. Each principal payment was in effect a separate financial transaction, repaying that percentage of the initial loan. If you borrowed £100k, and repaid £500 of it each month, then each of those £500 would alter the basis for the final calculation, I conjecture? That shouldn't be of any concern to the US. At the time of taking out the loan, and repaying that percentage of it - closing the loop for that £500 transaction - you weren't a US taxpayer and weren't obliged to use dollars as your functional currency for anything. Those parts of the translation are complete.

I'd argue that that you need to take the outstanding mortgage at the point of moving to the US. Therefore what you have is the FX gain on an outstanding borrowing of £80k: £80k was worth X dollars in Whichever Year you refinanced the mortgage; £80k is worth Y dollars in Now upon settling the mortgage, and you owe tax on the difference.

An interesting road bump might be any mortgage payments you've made since becoming US tax resident. If you're going to say that principal payments reduce the outstanding basis, then each of those would arguably be a miniature FX transaction in its own right and should be calculated and declared accordingly.

Disclaimer: not remotely a tax expert or accountant, just a finance nerd with spare time.

jimakos

If those are considered FX trades, wont they only be relevant if a gain of more than 200 is made? This is so confusing...

What stops me from overpaying everyday until i pay off the mortgage, making sure to not make 200$ gain per trade.

kodokan

Ah, didn't know about the $200 filing threshold thing. Assuming the usual sort of principal repayment monthly amount, I imagine none of any principal payments that have been credited to the mortgage since becoming US tax resident could trigger a filing requirement. Take the biggest dollar-sterling spread since you moved here, and do a rough calc.

What's everyone else doing? You can't be the only person here who has a house in the UK and is paying a mortgage each month. Presumably everyone has to choose between booking the mortgage principal payments as they go, paying/ not paying any resulting FX gain tax as applicable, and adjusting the loan cost basis - sort of a mark-to-market - or leaving it all until the end to come out in the wash. Isn't it the same principal as when US people in the UK declare their pension contributions to the IRS, to establish basis? Do it as you go along, or suck up the end result?

Dunno about your second point, but it's a fascinating idea. Is it something you could actually do financially - have funds, mortgage company would allow it - or more of an academic question? If the former, might be worth researching.

theOAP

Don't overthink this. I agree with much of what kodokan has said.

ALL IMHO - I know nothing.

It's the mortgage only which is the issue, the property itself doesn't enter into it. You negotiated a new mortgage at a point in time. You later paid off this newly negotiated mortgage.

The gain is treated as ordinary income (a)(1)(A), and according to most sites, it's entered on line 21. (988 gain, foreign mortgage.........$xxxx) It's defined in 988(c)(1)(B)(I). It does not meet any special rules under (a)(1)(B).

https://www.law.cornell.edu/uscode/text/26/988

I can find nothing that says the capital (but not interest) repayments since the initial acquisition can not be considered as part of the calculation.

You're not contesting the $200 exclusion by saying the gain doesn't apply to 988 rules. (e)(2)(B) The $200 doesn't enter into your scenario.

As for the proper way to calculate the gain, that's why knowledgeable professional tax preparers exist. If you prepare your tax return yourself, then you should make the best effort possible to be correct within your understanding. If your calculation is a result of not being able to find anywhere within obvious available IRS information, and is done to your sincere interpretation of the rule, then that is acceptable. The IRS, if they should ever question the calculation, which is doubtful, may disagree with your method. Since you gave it your 'best shot' (non-frivolous) and declared the gain , there should be no penalty for any disagreement. They can then explain how it should be done.

I can find nothing that indicates you must provide your calculations with the return. There are forms to be filed for 988 transactions, but they appear to be related to business transactions only (Form 4797, Part II). If you review this form and decide it does need to be filed, then do so. If you do use Form 4797, then you should review instructions as to where on the 1040 you report it. If it is still line 21, it would be - Form 4797.......$XXXX.

The example of a calculation provided in the link in post #18 will suffice. How you adjust either the acquisition amount or the final repayment amount as a result of the individual principal payments, would result from your calculations resulting in the best possible solution for you. There is nothing unusual in searching for a solution which best favours the taxpayer. Think of FEIE versus FTC.

Again, ALL IMHO - I know less than nothing.

theOAP

Incorrect assumption on my part. Disregard this post.

kodokan

Agree with theOAP that making a genuinely 'best belief' attempt is fair and what's expected from you, and the (very unluckily) worst case is you'll be audited, found to be wrong because reasons, and have to pay the difference.

If I had paperwork detailing the refinance, with a date, amount and signature on it, I'd consider that to be the start of the financial transaction. I would deduct any principal repaid before moving to the US as being settlement of loan amounts irrelevant to the IRS's view that dollars are the only functional currency, so no FX gain applies (Agsin, I'd want to be holding a mortgage statement that confirmed the outstanding balance at this time.)

I'd then deduct principal repayments made while in the US if they each remained under the filing threshold; otherwise I'd leave them as part of the outstanding lump for simplicity, I think.

So it would look something like (dates, numbers and FX rates are a total fantasy):

- take out (refinance) £100k mortgage in 2013, which in dollars is, say, $150k
- make repayments while in UK, reduce outstanding principal to £90k
- move to US in 2015, with £90k owing. Continue monthly payments, each of which results in less than $200 notional capital gain.
- mortgage is now £85k.
- it's 2016. Sell house, repay £85k. $150k x 0.85 should be $127,500. But thanks to the strong dollar from 2013 to 2016, you only need to use $110k to repay the the outstanding loan balance. You've made a profit/ capital gain of $17,500, which is added to your taxable income.

I think that makes sense. But again, this is just idle layperson speculation.