Capital Gains Tax.
Sep 2nd 2013, 12:13 am
#16
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Re: Capital Gains Tax.
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?
Sep 2nd 2013, 1:03 am
#17
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Re: Capital Gains Tax.
For the US you will have to pay CGT on the sale of your UK rental property unless you lived in the house for 2 out of the last 5 years.
If you have to pay CGT to both the UK and the US you will have to use the US/UK tax treaty to apportion the tax between the UK and the US. You will not be taxed twice, but you will end up paying total CGT that is the greater of the US and UK rates.
Sep 2nd 2013, 3:09 am
#18
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Re: Capital Gains Tax.
well sounds like we wont have to pay UK tax then as we have not been home (let alone lived) for over 5 years.
so now we need to understand how CGT is determined in the US so we make sure to 'save' enough to cover the tax return liability.
so now we need to understand how CGT is determined in the US so we make sure to 'save' enough to cover the tax return liability.
Sep 2nd 2013, 5:12 am
#19
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Re: Capital Gains Tax.
To give you a rough idea, first you determine the purchase price including expenses and convert that to US$ at the exchange rate at the time of purchase (you can search the internet and find a history of exchange rates of £ to $) and then you estimate the selling price minus expenses and convert that to $US dollars at the current exchange rate. If you are lucky and the exchange rate was high (i.e. $1.80 per £) when you purchased the home, the purchase price in US$ would be high and therefore possibly little or no long term capital gains would occur and therefore little or no taxes would be owed. Then you subtract the purchase price from the selling price and that is the long term capital gains. Then you take 15% of that and that is the tax on the gain but we are not through yet. Look at your last years tax returns where rental income was reported for that property and there should be and entry for depreciation and multiply that number by the number of years that you rented the property and multiply that by 25% (since you were previously getting tax break by depreciating the value of the home, you are now recovering the depreciation and paying tax at a capital gains rate of 25%) and add that number to the amount calculated previously.
Example:
Purchase price including expenses: $400,000
Selling Price minus expenses: $520,00
Long term capital gains: $520,000 - $400,00 = $120,000
15% tax on $120,000: $18,000
Depreciation: $5,000 * 6 years = $30,000 total
Tax on recaptured depreciation at capital gains rate of 25%: $30,000 * 25% = $7,500
Total tax liability on the sale of the house: $18,000 + $7,500 = $25,500
That should be the end of it but it is not because there may possibly be an Alternate Minimum Tax (AMT). Although capital gains are not taxed at more than the 15% or 25% rate indicated above, capital gains do determine if AMT is applied to other income. This is too complicated to give an easy explanation so I'm not going to get into the calculations but basically AMT says that if you total income is above a certain amount, that income (excluding capital gains) above an exemption level must be taxed at a minimum of 26%. It doesn't actually increase the tax rate on the other income but starts reducing certain deductions to raise the overall taxes collected.
As an example in the case of Romney's tax return of about $17 million, he had capital gains and qualified dividends of about $15 million and earned income of about $2 million and because his total income is so high, he should lose all of his deductions and pay at least 26% tax on the $2 million but one of the deductions that isn't lost is the deduction for charity so if he gives $2 million to the Mormon church, he pays a flat 15% tax on $15 million (was 15% on all his income since the 20% rate above $425,000 only started this year) and no tax on the $2 million earned income.
Of course besides federal income tax, you have to also calculate state income tax.
Last edited by Michael; Sep 2nd 2013 at 5:28 am.
Sep 2nd 2013, 5:20 pm
#20
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Re: Capital Gains Tax.
JAJ kept me honest and I had to research foreign tax credits. According to the IRS, foreign tax credits can be carried back 1 year and carried forward 10 years.
http://www.irs.gov/publications/p514...link1000224640
I wondered how that would exactly work. I wondered if the taxpayer would have to pay the taxes and then amend the return to claim the taxes back or if there was another mechanism. Upon further research I discovered that on form 1116, you can claim foreign taxes "Paid" or "Accrued". Therefore I suspect that you can either estimate taxes that will be paid in the next year or file an extension until the tax is paid and then check the box indicating "Accrued". However a tax accountant would know how to handle that issue.
http://www.irs.gov/pub/irs-pdf/f1116.pdf
http://www.irs.gov/publications/p514...link1000224640
I wondered how that would exactly work. I wondered if the taxpayer would have to pay the taxes and then amend the return to claim the taxes back or if there was another mechanism. Upon further research I discovered that on form 1116, you can claim foreign taxes "Paid" or "Accrued". Therefore I suspect that you can either estimate taxes that will be paid in the next year or file an extension until the tax is paid and then check the box indicating "Accrued". However a tax accountant would know how to handle that issue.
http://www.irs.gov/pub/irs-pdf/f1116.pdf
Sep 3rd 2013, 1:01 am
#21
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Re: Capital Gains Tax.
And what happens if you haven't been depreciating the house on tax returns? Just do the same calculation but without the depreciation or do you have to go back and re-do tax returns?
Sep 3rd 2013, 4:57 am
#22
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Re: Capital Gains Tax.
When I first bough a rental apartment in the US I forgot to depreciate the apartment.....I did it for the contents. but not the apartment it self. I filed 1040X. If you have forgotten to depreciate anything you can file 1040X back 3 years.
Sep 5th 2013, 3:58 pm
#23
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Re: Capital Gains Tax.
Long term capital gains are normally taxed at 15% unless your total income exceeds about $425,000 and then is taxed at 20% above that amount. We'll assume that your total income does not exceed $425,000 and use the 15% long term capital gains rate.
To give you a rough idea, first you determine the purchase price including expenses and convert that to US$ at the exchange rate at the time of purchase (you can search the internet and find a history of exchange rates of £ to $) and then you estimate the selling price minus expenses and convert that to $US dollars at the current exchange rate. If you are lucky and the exchange rate was high (i.e. $1.80 per £) when you purchased the home, the purchase price in US$ would be high and therefore possibly little or no long term capital gains would occur and therefore little or no taxes would be owed. Then you subtract the purchase price from the selling price and that is the long term capital gains. Then you take 15% of that and that is the tax on the gain but we are not through yet. Look at your last years tax returns where rental income was reported for that property and there should be and entry for depreciation and multiply that number by the number of years that you rented the property and multiply that by 25% (since you were previously getting tax break by depreciating the value of the home, you are now recovering the depreciation and paying tax at a capital gains rate of 25%) and add that number to the amount calculated previously.
Example:
Purchase price including expenses: $400,000
Selling Price minus expenses: $520,00
Long term capital gains: $520,000 - $400,00 = $120,000
15% tax on $120,000: $18,000
Depreciation: $5,000 * 6 years = $30,000 total
Tax on recaptured depreciation at capital gains rate of 25%: $30,000 * 25% = $7,500
Total tax liability on the sale of the house: $18,000 + $7,500 = $25,500
That should be the end of it but it is not because there may possibly be an Alternate Minimum Tax (AMT). Although capital gains are not taxed at more than the 15% or 25% rate indicated above, capital gains do determine if AMT is applied to other income. This is too complicated to give an easy explanation so I'm not going to get into the calculations but basically AMT says that if you total income is above a certain amount, that income (excluding capital gains) above an exemption level must be taxed at a minimum of 26%. It doesn't actually increase the tax rate on the other income but starts reducing certain deductions to raise the overall taxes collected.
As an example in the case of Romney's tax return of about $17 million, he had capital gains and qualified dividends of about $15 million and earned income of about $2 million and because his total income is so high, he should lose all of his deductions and pay at least 26% tax on the $2 million but one of the deductions that isn't lost is the deduction for charity so if he gives $2 million to the Mormon church, he pays a flat 15% tax on $15 million (was 15% on all his income since the 20% rate above $425,000 only started this year) and no tax on the $2 million earned income.
Of course besides federal income tax, you have to also calculate state income tax.
To give you a rough idea, first you determine the purchase price including expenses and convert that to US$ at the exchange rate at the time of purchase (you can search the internet and find a history of exchange rates of £ to $) and then you estimate the selling price minus expenses and convert that to $US dollars at the current exchange rate. If you are lucky and the exchange rate was high (i.e. $1.80 per £) when you purchased the home, the purchase price in US$ would be high and therefore possibly little or no long term capital gains would occur and therefore little or no taxes would be owed. Then you subtract the purchase price from the selling price and that is the long term capital gains. Then you take 15% of that and that is the tax on the gain but we are not through yet. Look at your last years tax returns where rental income was reported for that property and there should be and entry for depreciation and multiply that number by the number of years that you rented the property and multiply that by 25% (since you were previously getting tax break by depreciating the value of the home, you are now recovering the depreciation and paying tax at a capital gains rate of 25%) and add that number to the amount calculated previously.
Example:
Purchase price including expenses: $400,000
Selling Price minus expenses: $520,00
Long term capital gains: $520,000 - $400,00 = $120,000
15% tax on $120,000: $18,000
Depreciation: $5,000 * 6 years = $30,000 total
Tax on recaptured depreciation at capital gains rate of 25%: $30,000 * 25% = $7,500
Total tax liability on the sale of the house: $18,000 + $7,500 = $25,500
That should be the end of it but it is not because there may possibly be an Alternate Minimum Tax (AMT). Although capital gains are not taxed at more than the 15% or 25% rate indicated above, capital gains do determine if AMT is applied to other income. This is too complicated to give an easy explanation so I'm not going to get into the calculations but basically AMT says that if you total income is above a certain amount, that income (excluding capital gains) above an exemption level must be taxed at a minimum of 26%. It doesn't actually increase the tax rate on the other income but starts reducing certain deductions to raise the overall taxes collected.
As an example in the case of Romney's tax return of about $17 million, he had capital gains and qualified dividends of about $15 million and earned income of about $2 million and because his total income is so high, he should lose all of his deductions and pay at least 26% tax on the $2 million but one of the deductions that isn't lost is the deduction for charity so if he gives $2 million to the Mormon church, he pays a flat 15% tax on $15 million (was 15% on all his income since the 20% rate above $425,000 only started this year) and no tax on the $2 million earned income.
Of course besides federal income tax, you have to also calculate state income tax.
Hubbie was quite excited when i told him we took the different exchange rates into account as he was thinking of the 2 dollar rates when we actually arrived here. Course- when i looked up the actual for when we did the house purchase it was 1.46 (eek) so NOT in our favor lol.
But i've worked it out according to the example above and its not as bad as we thought. So thank you for the help. you have certainly settled our minds somewhat!
Sep 28th 2013, 8:35 am
#24
L2, GC, Surrey, OH, TX!
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Re: Capital Gains Tax.
sorry to revive this one but i have another question and thought this would be easier as it has most of the history already there.
we expect to sell our uk house at a profit and thus we asked about the CGT gains above.. But its also looking like we will sell the US house for a loss. (ie less than the cost). Can we offset that loss anyway to reduce the overall liability - or do they treat the CGT made in the uk separately?
we expect to sell our uk house at a profit and thus we asked about the CGT gains above.. But its also looking like we will sell the US house for a loss. (ie less than the cost). Can we offset that loss anyway to reduce the overall liability - or do they treat the CGT made in the uk separately?
Sep 28th 2013, 11:39 am
#25
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Re: Capital Gains Tax.
sorry to revive this one but i have another question and thought this would be easier as it has most of the history already there.
we expect to sell our uk house at a profit and thus we asked about the CGT gains above.. But its also looking like we will sell the US house for a loss. (ie less than the cost). Can we offset that loss anyway to reduce the overall liability - or do they treat the CGT made in the uk separately?
we expect to sell our uk house at a profit and thus we asked about the CGT gains above.. But its also looking like we will sell the US house for a loss. (ie less than the cost). Can we offset that loss anyway to reduce the overall liability - or do they treat the CGT made in the uk separately?
On the other hand if your home was an investment property and not a primary residence, then you would then be liable for tax on capital gains and therefore you could use any capital losses from the sale of that property to offset other capital gains.
Sep 5th 2014, 8:46 am
#26
L2, GC, Surrey, OH, TX!
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Re: Capital Gains Tax.
i found this note about changes for foreign residents - and thought i would add it in here in case it affects anyone.
from this article: A new capital gains tax charge for non-residents - Lexology
With effect from 6 April 2015, the UK’s CGT regime will be extended to tax foreign residents who realise gains from a disposal of UK residential property.
It is currently understood that any gains which have accrued before this date will be excluded from the tax charge. However, in relation to those properties acquired before this date and disposed on or after this date, it will be necessary to calculate what amount of the total gain should be excluded from the CGT charge.
It is currently understood that any gains which have accrued before this date will be excluded from the tax charge. However, in relation to those properties acquired before this date and disposed on or after this date, it will be necessary to calculate what amount of the total gain should be excluded from the CGT charge.
