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Brit based in the US selling rental property in the UK

Brit based in the US selling rental property in the UK

Old Feb 8th 2024, 6:38 pm
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Default Brit based in the US selling rental property in the UK

Hi, I was wondering if anyone could direct me. We moved from London to the US 6 months ago. We have a rental flat back in the UK and I am thinking it is probably easier to sell it now.
If we sell, is it UK or US tax (or both) that we pay on the capital gains?
Are there any timelines that I should be aware of?
Thank you!
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Old Feb 8th 2024, 8:45 pm
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Default Re: Brit based in the US selling rental property in the UK

So long as the house was your primary residence for at least 2 out of the 5 prior years then there is no US capital gains tax to pay on the sale. There will however likely be UK tax to pay on the sale, and you must report the sale either way.https://www.gov.uk/guidance/capital-...ntial-property Be sure to comply with foreign account reporting on FBARs, and Form 8938 as applicable because not reporting foreign funds even if held for less than a day is a big deal with potentially severe penalties for not dong so. Of course, do not invest the proceeds in UK investment vehicles because of further foreign reporting requirements and taxation issues.

You may also have to pay tax on any foreign currency gain associated with redeeming a mortgage. To calculate the foreign currency gain on the mortgage redemption, take the amount redeemed in GBP and multiply it by the exchange rate on the date the mortgage originated, take the same GBP redemption amount and multiply it by the exchange rate on the date the mortgage is redeemed. Subtract the redemption amount in USD from the origination amount in USD. If the amount is positive that is your foreign currency gain. If negative there is nothing to report, and no benefit to a loss. The exchange rates can really work against you if the exchange rate dropped since mortgage origination. In your case it is quite possible that the exchange rates rose and if so the foreign exchange tax won’t apply. The origination date is the date you originated the current mortgage so if you refinanced it is the date you last refinanced.

You need to report your rental income on your US tax return even if you are making a loss. By the time you add in all of the allowed expenses and depreciation there likely will be no tax to pay, but excluding foreign income is a very big deal so make sure you complete Schedule E on your tax return.
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Old Feb 8th 2024, 9:23 pm
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Default Re: Brit based in the US selling rental property in the UK

Thank you - this is very helpful!

The flat has been rented out for the last 20 years (I own it with my sister). How does this impact things?

Our current mortgage comes to an end this month, which is why we were thinking of selling. Would it make sense to take out a new mortgage and sell it at a later date?
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Old Feb 8th 2024, 11:44 pm
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Default Re: Brit based in the US selling rental property in the UK

If the flat has been rented for 20 years then you will have to pay US Capital GainsTaxes on your share of the profit, which if jointly owned with one other will be 50% of the profit. You will also have to pay UK Capital Gains Taxes on the profits since 6 April 2015. If the UK tax is less than the US tax then you will have to pay the IRS the difference, if the UK tax is more than the IRS tax then you will have nothing further to pay. This link provides more information on the UK tax.https://www.gov.uk/guidance/capital-...e-gain-or-loss

With regard to the foreign currency gain, that applies when the mortgage is redeemed regardless of whether or not you sell the property. If it has been 20 years since the mortgage was originated it is quite likely that that there are foreign currency gains and you will owe tax on 50% of those gains. That amount is taxed at ordinary income rates. If you take out a new mortgage (or refinance) then the foreign currency tax will need to be calculated again when that mortgage is redeemed.

Hopefully you have been reporting your share of the rental income to the IRS, and depreciating the property. You will have to pay tax on the annual depreciation amounts that should have been taken, whether or not you actually took the depreciation on your annual tax return.
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Old Feb 9th 2024, 12:00 am
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Default Re: Brit based in the US selling rental property in the UK

Thank you.

I moved to the US 6 months ago, so I have not filed a tax return here yet. I am not working at the moment.

I have been paying tax in the UK on the rental income since we started renting it out.

I'm confused by the foreign currency gain. Would it make better sense to pay off the mortgage in the UK over a the next few years (it's about 90k)? What would you recommend is the best course of action?
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Old Feb 9th 2024, 2:31 am
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Default Re: Brit based in the US selling rental property in the UK

First calculate if there is a foreign currency gain, the details on how to do so are my earlier post. If none forget about it. If there is a potential foreign currency gain then the only way to avoid it is to pay off the principal in increments that result in $200 or less of foreign currency gain because any single transaction resulting in a gain of less than $200 escapes the foreign currency tax. You can have as many of those transactions as you like, although eventually a red flag may be raised. That may or may not be viable for you. If not, it is what it is and all you can do is to plan for the additional tax when the mortgage is redeemed, or wait until the exchange rate changes in such a way that that the foreign currency gain is reduced, but to be honest that is a bad idea as the exchanges rates could move to increase the gain, none of us have a crystal ball on that one.
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Old Feb 9th 2024, 1:40 pm
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Default Re: Brit based in the US selling rental property in the UK

Thank you!

When you say the date the mortgage originated, is it the date we bought the property (circa 20 years ago)?

Or the date that we started the current mortgage (2 years ago)?

I lived in the property for a number of years before renting it out, does that have any impact on this?
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Old Feb 9th 2024, 2:13 pm
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Default Re: Brit based in the US selling rental property in the UK

The date the current mortgage originated which is great news if only two years ago because that will make a huge difference to the foreign currency gain, perhaps even eliminating it.

From the USA perspective unless it was your principal residence for two out of the 5 years immediately preceding the sale, it makes no difference that you lived in it before that. From the UK side I think they only factor in time that you lived in the property since 2015 since that is the date from which you have to pay capital gains taxes,
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Old Feb 9th 2024, 3:00 pm
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Default Re: Brit based in the US selling rental property in the UK

Ah - that makes it much less complicated.

Thank you! You have been very helpful.
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