jimakos

I think I might end up doing that. Doing individual deductions (none make a $200 gain) currently save around $1k on reportable income. By the time i sell it would probably be more.

Not taking any deductions from the remortgage date is not that bad either, but if i don't use the remortgage date and do a straight up comparison from start to end the income changes from just under $14k to $46.5. Thats a big big difference

theOAP

Again, this is only my opinion.

I really do think you're over complicating this. Forget the $200 cap gain. I do not understand where this comes from. Are you reading Section 988(e)(2)(B)?

The monthly repayments are not individual transactions. In 2013, you signed for a foreign debt obligation (the obligation). Part of that obligation was to repay in monthly payments. The monthly payments are part of the obligation.

If you really want to declare this, you have several ways of calculating this. You may add up all the principal (monthly) payments you've made since assuming the obligation; add those to the final repayment; convert to the functional currency ($US), and calculate the gain.

Or, probably more correctly, you could calculate the value of each monthly repayment on the date of payment; convert to functional currency for each on those days the payments were made; then add the total of those repayments to the final repayment after it has been converted to the functional currency; and calculate the gain.

If there is a gain, it goes on line 21 of 1040 as ordinary income.

If you wait until 2018, exchange rates may have reversed and you would not have a 988gain, but you would have lost the $250,000 exemption on the sale of the property since you no longer meet the primary residence test. If you continue to keep the property, making monthly payments until the natural ending of the obligation, you'll likely have no 988 gain, but will still have lost the primary residence exemption.

You know all this.

It's simply a matter of deciding what you want to do with the property first, and then paying whatever tax is due. It's free money to the IRS, they won't mind which decision you make.

jimakos

Ye, i am was ignoring the $200 (i was just checking if i actually went over in any payment).
Also i am not sure about the calculations starting from when I started being a US Tax resident.

So ignoring all that, i see 4 viable options:

1. [Worse for me]. Take the amount and FX rate at inception of mortgage and compare the same amount at end of mortgage, ignoring capital repayments the last 4+ years.

2. Take the remaining amount from the remortgage date and FX rate and compare it against the same amount at the payoff (sale) date, ignoring repayments.

3. Take the remaining amount from the remortgage date, calculate the USD deductions from every single payment since, remove that amount from the original amount along with the one off sale date amount and rate.

4. Just take the remaining amount of mortgage at sale date and compare that amount with the remortgage date FX rate. (This logic seems to allow me to do a 100k payment now and compare the remaining lower amount at sale later, which seems wrong).

So its most likely 2 or 3, whatever seems lower.
Thoughts?

HartleyHare

Having read through the thread, I have the following question to those who are more knowledgeable on these matters:

If the OP has been renting his UK property out whilst in the US and has been claiming property depreciation, will they be liable for "depreciation recapture" upon the sale of the property?

I have seen this discussed before in the US forums, but I don't know how it works and whether there would be any additional tax implications for the OP.

jimakos

Yes I was claiming that, and that would be added back at a different tax rate I believe

theOAP

In April 2011 you acquired a mortgage in £s. At the time, you were not a US Person. You made payments on the principal in £s.

In August 2013 you altered the mortgage. At the time, you were not a US Person. Only you can determine if at the time it was only a minor alteration and the original mortgage remained in force, or whether it can be considered a new mortgage, for which you re-signed a mortgage contract. You continue making principal payments in £s. Whichever event you select, the original contract or the refinanced contract, will be the starting point for the principal repayment calculations.

In April 2016, you are considering selling the property. At this time, you are a US Person and you feel you are subject to a Sec. 988 review on a foreign mortgage (foreign debt obligation). You have continued making the principal payments in £s. At this time, you will have made a total of approximately £100,000 in principal payments towards settling the contract.

IMHO, when you became a US Person is not important. You will be one at the time of sale and only that is important.

I don't see why you would disregard the £100,000 in principal payments you've already made. They are part of meeting your obligation on the debt.

The original (or refinanced) mortgage has a value in £s. IMHO, I don't think you can alter that. What you can do is consider the principal payments you've made together with the final principal payment you will make as the amount of the total principal repayment you have made against the obligation. If all £s are converted to $s at the time of the original or refinanced mortgage contract, and all principal payments are converted to $s at the time they were (and will be) made (an exchange calculation for each payment on the date it is/was made), and the total of all principal payments in $s is less than the original or refinanced amount in $s, you have a 988 gain for the difference.

IMHO, everything is centred around the foreign debt obligation; it's value at inception, and the total value of all the repayments to close the obligation. IMHO, nothing else matters.

jimakos

So i think we are on the same page.
I think you described my #3 option which i believe is the most beneficial for me too, taking into account FX luck

theOAP

I don't agree with 3. IMHO, you can not alter the amount of the initial obligation.

jimakos

So i can use the rate but not the amount from the remortgage/refinance date?

theOAP

IMHO, you use the original amount converted to dollars. You total all repayments including the final payment (amounts converted to dollars). You subtract the total of all the payments (monthly and final) in dollars from the original amount in dollars. That gives you the gain or loss.

That may be what you meant in 3 and I misinterpreted it.

kodokan

I think, given the small amount involved, I'd be inclined to ignore the small payments to principal to avoid looking like I'm somehow manipulating the system.

I'd stick with 'I began this mortgage in August 2013 and repaid it in XX 2016. In 2013 it was worth X dollars; 2016 it is now worth Y dollars. I've included X-Y in my taxable income'.

My layperson's opinion is that a refinance is a new mortgage. It has a new rate, a new amortization payment schedule, you were re-qualified (I imagine?), had to sign a new loan doc, etc.

In AZ, all mortgage docs are scanned and put online on the county recorder's website (along with house title purchases, court judgements, etc, which all boggled my mind upon arrival). A refinance is added as a new transaction, logged on the site with a new date. Now, I can't tell from looking if someone refinanced and took out more money (probably...) or if it was just a rate change. But there was certainly a lot of it about in 2013. I believe the American perception of refinance is that it's a new transaction.

jimakos

So back to either option #2 (simplest) or #3 which might save some pennies. Ill decide i guess when i do next year's taxes after the sale.

I still think I should continue to look for any knowledgeable CPAs. Im calling NYC CPAs and i have yet to find anyone that is aware of this without them having to look stuff up

theOAP

In 2011, the mortgage was £320,000. At final payoff, the mortgage will be £220,000. If £99,500 was paid against the principal between 2011 and 2013, and the amount of the refinanced mortgage in 2013 was £220,500, then I might agree. It may not worth the hassle of making all the calculations, but that means the interest rate between 2013 and 2016 is what, 0.5%? How could including all principal payments made since the beginning of the loan period be seen as manipulating the system?

theOAP

Terminology between the two mortgages is causing a problem, and I have the value of the April 2011 mortgage wrong. Let's try this:

MV1 = £256,000 - The mortgage value of April 2011
PP1 = £??? - The total of the principal payments between Apr. 2011 and Aug. 2013

MV2 = £??? - The mortgage value of August 2013
PP2 = £??? - The total of the principal payments between Aug. 2013 and March 2016

FP = £220,000 - The final payment in April 2016


If you decide to use MV2 as the basis (it's your decision), then:
MV2($) . minus . [PP2($) plus FP($)] = 988 gain or loss

If MV2 is £220,500, then the exercise may not be worth the trouble to calculate the principal payments, so it becomes MV2($) minus FP($). It's your choice.

If MV2 is £230,000, then it may well be worth the effort to calculate the principal payments. It's your choice.

Double check NIIT. Are you liable? Probably not, since the 988 gain is taxed as ordinary income, but check.

Good luck, and I hope all turns out well.

jimakos

All your methods seem solid. As you said it seems its up to me to choose MV1 or MV2 to start which makes a massive difference.

You got me worried with NIIT, but it seems from a quick googling that if you claim the sale of first residence (and claim 250k allowance) NIIT doesnt apply (at least for the sale).
Please correct me if im wrong