MsElui

Anyone have any info on how this applies over here? I did a quick search and didnt find anything in the wiki or specific threads so i thought id ask here.

Essentially we have been here in the US 6 years (L1A and now GC). (i know time plays some part in it). We have owned a home here in the US for 5 years but are in the process for selling that in order to relocate to another state. There will be no NO GAIN on the sale of the US house?

We are thinking of selling our UK home which is currently rented out. We have jointly owned it for 12 years. Its currently on an interest only mortgage and we might sell it for 120k over the price we paid back in 2001. It was remortgaged mid way through so we wouldnt make that much after the mortgage was paid off ( maybe 90-100k?)

Would we pay CGT on the uk, and then declare that over here on the tax form so we didnt get hit for cgt twice? Or would we pay it here? (how would we handle not paying it in the uk?) or are we going to get hit twice regardless?

In the uk, i know we have 'personal tax allowances' each, and that the length of ownership can be used to right off some of the 'gain'. I'm led to believe here its done differently? ie no time write off, depreciation taken into account, and no uk allowance. but is that right? Does the fact that its in the UK make a difference?

Would it make a big difference if we could work it that when the uk house sells we are no longer owning a house over here? (we would be intending to buy again in the the new state BUT we could be in a hotel/rental for a month or two while we get the new place sorted etc.

Any general things to avoid or advice to make the best of the situation would be appreciated.

Michael

If you pay capital gains in the UK, those foreign tax credits can be used to offset US taxes owed. If you have been depreciating the home on your US return (which you were supposed to be doing when renting out the property), you will have to recover that depreciation as capital gains.

Normally I like to advise people to sell their home in the UK within 3 years if you are going to sell since the US has a $500K exclusion for married filing jointly for capital gains on the sell of a primary residence (residence you lived in for 2 of the previous 5 years). After that, the property converts to investment property and there is no exclusion for capital gains.

Whether you will owe US tax will likely depend on whether the UK will tax the gains and at what tax rate. Normally the US has a maximum capital gains tax of 15%.

The amount of the mortgage has nothing to do with taxes other than the interest mortgage deduction.

Pulaski

Assuming the gain on your US house does not exceed $500,000, and has been your primary residence for at least two of the past five years, there is no CGT impact at all.

jackattack

But OP says that they have been in the US for the past six years. So it cannot have been the primary residence.

Michael

She said there would not be any gain on the US home so that wouldn't be a concern but was concerned about the tax on the gain of the UK house when it was sold.

Pulaski

That was her assumption, but she added a question mark, which you appear to have not noticed.
I specifically said "US house", and I presume that like Michael, you didn't notice the question mark that the OP added after her stated assumption about CGT on her US house.

md95065

Actually the OP said:
Which doesn't really make any sense.

There may or may not be a gain on the sale of the US property - that depends on what the basis is and what the eventual sales price is.

If there is no gain then there is clearly no capital gains tax.

If there is a gain then the OP may or may not be eligible for the $500k exclusion depending on whether or not the house has been their primary residence for 2 of the last 5 years ...

Pulaski

Yes it does. It is a common enough device in the English language, to make a question out of a statement, by the tone of the voice in which it is delivered, which is completely lost when typed in a web forum.

The rest of your post merely restates in a different order and with different emphasis, what I said when I answered the OP's stated assumption/ question.

md95065

Indeed, but the question asked was about "gain" not "taxes" (and included a double negative "no NO" which I think we both assumed was a typo).

You correctly answered the question that the OP almost certainly meant to ask but not the one that she actually did ask ...

Pulaski

MsElui

The question mark was a typo ON MY PART SORRY. We are not going to make any gain on the us house when we sell, likely a small loss or break even.

We want to sell the uk house and there will be a gain there, plus it's well over three years since we arrived in the us. So we cant escape that, just wondered how we would deal with it best. I assume we would declare it on our uk tax return, but assuming we sell it before end of 2013, the us tax return will become due first.

Lets say for he sake of argument it made a 130k gain in those 12 years.

Michael

Normally the British get first crack at taxes for sale of property in the UK.

It is not the amount of taxes paid when you file your British tax return that determines the foreign tax credits but the amount of foreign taxes that is paid in that fiscal year. So be careful with a year end sale if you don't pay the foreign taxes in the same year because if they are paid in another year, you may never be able to use the foreign tax credits.

Think of it in the same way that the federal tax return allows for a state income tax deduction. They aren't interested in how much taxes were finally paid when you file your state return but only the amount that was withheld plus estimated payments that were made during the fiscal year. If the British don't have a system to withhold taxes on the sale of the property or that allows you to make an estimated tax payment, I wouldn't sell the house until next year.

MsElui

so are you saying, if we sold the uk property in the calendar year 2013, then when we do our US return for 2013 we would have a CGT liability, but as we would not have actually 'paid' any tax in the uk until we did the tax return in april 2014 - we would then have to pay cgt again in the uk? ending up paying twice?

Michael

The first thing you have to determine is if there is a tax treaty between the UK and US concerning capital gains on the sale of property where the UK doesn't tax the gains but the US does. If that is the case, then there is isn't any double taxation problem.

However if that is not the case, then it appears that there could be a problem if you sell it after April 6 of any year if you don't pay the UK taxes before Dec 31 of that year. I don't know UK tax law but do they allow someone to have capital gains without paying taxes until they file their tax return? In the US if you do that, normally you will have to pay a penalty and interest on the taxes owed and if you do it too often, the IRS will require withholding anytime a capital gains occurs. This happens often with people that play the market and don't file quarterly tax estimates and then eventually the broker gets a notification from the IRS to withhold a certain percentage of for taxes. Usually the amount withheld is significantly above the amount that would be owed and the taxpayer would have to wait until he files his tax return to get the excess amount back.

The US tax year is from Jan 1 - Dec 31 and the UK tax year is from April 6 - April 5. The two do not match and the US is interested in the amount made from Jan 1 - Dec 31 and the taxes paid during that time to claim income and foreign tax credits on their tax return during the US tax year. If you have a foreign sale in one year and pay the foreign taxes on that sale in another year, you'd have to report the sale during the year of the sale but you can't claim the tax credits until the following year's tax return. I don't believe that you can carry foreign tax credits backwards but they just continue to carry forward to be used against another foreign sale in that year or future years.

Everything in the US is based on tax year. For example, my property taxes are 1/2 due in Dec and 1/2 in April but I can pay the full amount in Dec and take that full amount along with the payment I paid during the previous April as a deduction for this year. This is allowed and people do that for tax planning. The can also pay medical bills, make charitable donations, and other deductions before or after the end of the year to move deductions from one year to the other. So everything is based on when something is paid and not when it is due or owed. For people that don't have deductions that are larger than the standard deduction, they may be able to move payments from one year to the next allowing them to itemize deductions one year and use the standard deduction the next year saving them taxes.

Except for corporations, I've never heard of anyone being able to carry tax credits backwards. The US is interested in the income made and the taxes paid from Jan 1 - Dec 31. However to make sure, you'll have to check with a tax accountant to see if it is possible to move tax credits backwards.

JAJ

I thought that normally if you are out of the U.K. for at least 5 years, you don't pay U.K. capital gains tax. Except on a few specified asset classes. Check on HMRC website.