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Confused about US Capital Gains Tax on UK House Sale

Confused about US Capital Gains Tax on UK House Sale

Old Nov 15th 2020, 10:07 pm
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Default Confused about US Capital Gains Tax on UK House Sale

Hello, I wonder if someone can help me understand this a bit better? I've read through a few historic threads about this subject but I'm still confused.

This is my situation:

I moved to the US in December 2017. I paid off my mortgage just before I moved.

I bought my UK house in 2006 and its sale is currently due to complete on Dec 4, 2020. However, there are some problems with the chain which means the agent is suggesting we push the completion date back to after Christmas. I'm trying to work out whether I should allow this.

I paid £369,000 for it and am selling it for £410,000.

I think that I become liable for U.S. CGT on December 18, 2020 as up until that date I will have lived in it for 2 out of the previous 5 years. I assume if I complete before Dec 17 then U.S. CGT will not apply ( I know I have to also consider UK CGT but I think I understand that part of it).

So If my logic above is correct, I think if I allow the completion to happen after Christmas I think I become liable for U.S. CGT but I am unsure how to work out how much that would be.

I know that there are forex implications of the sale vs purchase price but I am unsure how you apply these.

I've also read that there are forex implications associated with mortgages but I am unsure whether these come into play as I paid off my mortgage before moving to the US.

Can anyone help me work out whether/how much U.S. CGT I might have to pay?

many thanks

Melly


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Old Nov 16th 2020, 3:28 am
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Default Re: Confused about US Capital Gains Tax on UK House Sale

Originally Posted by melusine View Post
Hello, I wonder if someone can help me understand this a bit better? I've read through a few historic threads about this subject but I'm still confused.

This is my situation:

I moved to the US in December 2017. I paid off my mortgage just before I moved.

I bought my UK house in 2006 and its sale is currently due to complete on Dec 4, 2020. However, there are some problems with the chain which means the agent is suggesting we push the completion date back to after Christmas. I'm trying to work out whether I should allow this.

I paid £369,000 for it and am selling it for £410,000.

I think that I become liable for U.S. CGT on December 18, 2020 as up until that date I will have lived in it for 2 out of the previous 5 years. I assume if I complete before Dec 17 then U.S. CGT will not apply ( I know I have to also consider UK CGT but I think I understand that part of it).

So If my logic above is correct, I think if I allow the completion to happen after Christmas I think I become liable for U.S. CGT but I am unsure how to work out how much that would be.

I know that there are forex implications of the sale vs purchase price but I am unsure how you apply these.

I've also read that there are forex implications associated with mortgages but I am unsure whether these come into play as I paid off my mortgage before moving to the US.

Can anyone help me work out whether/how much U.S. CGT I might have to pay?

many thanks

Melly
The exchange rate was high in 2006- suppose you bought when it was $1.80 and you sell when it is $1.30. Then in dollar terms you bought for 369,000 x 1.80 = $664,200, and sold for 410,000 x 1.30 = $533,000. So you lost $664,200 - $533,000 = $131,200, plus expenses. So you don't have to pay any US CGT.

Last edited by vespucci; Nov 16th 2020 at 3:50 am.
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Old Nov 16th 2020, 8:03 pm
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Default Re: Confused about US Capital Gains Tax on UK House Sale

Originally Posted by vespucci View Post
The exchange rate was high in 2006- suppose you bought when it was $1.80 and you sell when it is $1.30. Then in dollar terms you bought for 369,000 x 1.80 = $664,200, and sold for 410,000 x 1.30 = $533,000. So you lost $664,200 - $533,000 = $131,200, plus expenses. So you don't have to pay any US CGT.
Agreed, the exchange rate was above $1.72 for the entire year, most of it over $1.80, and some of it over $1.90, peaking at $1.98, so a dollar loss for CGT purposes is certain no matter what date you purchased it in 2006.
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Old Nov 19th 2020, 8:55 pm
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Default Re: Confused about US Capital Gains Tax on UK House Sale

I think from a US perspective there is a non-deductible personal loss. If the property was rented out there is still tax on recapture of depreciation. In the UK a CGT return will be required within 30 days of sale.
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Old Nov 20th 2020, 9:36 pm
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Default Re: Confused about US Capital Gains Tax on UK House Sale

How does it work if there is still mortgage to be paid off?
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Old Nov 21st 2020, 12:04 am
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Default Re: Confused about US Capital Gains Tax on UK House Sale

Originally Posted by Blanca View Post
How does it work if there is still mortgage to be paid off?
Then there may be a gain on the redemption of the mortgage if the Pound has fallen in value against US$ since you originally took out the mortgage. Here is an example that I posted previously:
The capital gain on the payoff of your mortgage is created because it took fewer dollars to pay off the balance than you received when you took out the mortgage.

Say you borrowed £120,000 when the exch rate was $2/£1, so from the IRS's perspective you borrowed $240,000. Several years later, after you have paid off £20,000 and moved to the US you sell the house and pay off the mortgage. The exch rate is now $1/$1, so it costs you £100,000 to pay off the mortgage, but at today's rate, from the IRS's perspective, it only cost you $100,000 to pay off the mortgage, not the $200,000 (the unpaid down part of what you received) that the IRS says you received. Therefore you have a taxable gain of $100,000, being the difference between the "£100,000 @ $2/£1" balance on your mortgage and the $100,000 that it cost you to pay off the mortgage!


In short, it's the difference between the current dollar value of the mortgage payoff amount and the dollar value of the mortgage payoff amount at the exchange rate on the day you originally took out the mortgage (or most recent refinance if you have refi'ed at some point).
A loss on sale of your home is generally considered to be non-deductible, as per Cook County above, so I am highly sceptical that a loss on sale of your home could be set against a gain on the mortgage even though the home and the mortgage are inextricably linked, but I could believe that some tax professionals might disagree with me.

Last edited by Pulaski; Nov 21st 2020 at 12:08 am.
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