JAJ

Except that most of the time, a foreign property is rented and hence is a qualified business unit and the functional currency is local, not the U.S. dollar. So these so-called exchange gains/losses don't exist, most of the time. Even if one accepts this revenue ruling as definitive.

As for the rest of the time, is the IRS really out there auditing U.S. citizens overseas to see if they have declared supposed exchange rate gains on mortgages? Really? The reality is that compliance is close to 0% and there aren't reports of the IRS even looking for this issue on audit. Despite the fact they know that many overseas U.S. citizens do have foreign currency mortgages.

nun

If the property was purchased as an NRA the functional currency was GBPs. Does the IRS ruling require someone who pays off a foreign mortgage to go back and use the $ as the functional currency? The ruling specifically addresses the foreign exchange gain for mortgages owned by US citizens, there's no mention of resident aliens. So take the IRS at it's word on this one if you are not a US citizen.

If you are a US citizen with a UK mortgage do you have to calculate the foreign exchange gain/loss for every mortgage payment you make? What about a foreign credit card? If you buy something at the beginning of the month and the exchange rate changes before you pay your bill at the end of the month do you declare any ForEx gain? Do you need to track this in case the gain goes over $200?

mralpen

Ah - "US citizen" vs "resident alien". Makes sense, but I think I will play safe and avoid any risk of confusion. Thanks so much everyone for debating this!

JAJ

You could probably take the view that it's $200 per transaction. Or if it's a business, the functional currency is local, not the U.S. dollar. But the chances of being challenged on this by the IRS have to be as close to 0% as it's possible to be. If the IRS were routinely asking overseas U.S. citizens to calculate exchange gains on these kinds of transactions, I would expect that we would hear a lot more about it. In a non-theoretical context.

Pulaski

What great questions. They could be debated ad nauseum on a web forum by people who have nothing better to do.

nun

Touche........but they are the logical extension to the foreign loan ForEx issue. Is there a line and if so where should it be drawn and would residency status ever be considered?

Pulaski

I think the line should be "was FX risk part of the contract at the outset?", or was a transaction timed to (try to) make an FX gain? In the former case, if you were resident in the UK when you took out the mortgage and later relocated to the US then an FX gain (or loss) was no part of your original expectation and should not be taxed. In the latter case, holding foreign currency (cash account) before later exchanging it for USD, would be speculation that could lead to taxable gains. Also ANY exchange of USD for another currency for investment purposes should be covered, since the risk of an FX rate movement is (should be) inevitably part of the investment decision.

nun

Sounds reasonable, unfortunately the IRS says that a US citizen's functional currency is always the $ which potentially gets US expats into all this trouble. Maybe there's a good argument to be made for non-US citizens who purchased a home as NRAs as their functional currency was obviously not the $ - I don't know.

The complication of foreign exchange gain for a US citizen on paying off a foreign mortgage seems pretty "cut and dried", but I usually seen it raise for lump sum payoffs. I don't see how the monthly mortgage payment is any different. If the exchange rate changes form the time the loan was taken out isn't it necessary for the US mortgagee to calculate the loss or gain at current exchange rates for each monthly payment and then pay tax on any gain in excess of $200. Would that also apply to other foreign loans? Obviously this would greatly complicate the tax return and it is tending towards the ridiculous, but which FX items should be tracked and which ignored?

dunroving

So can FX losses be offset on US tax returns?

For example, sale of a US house and return to the UK. When US house purchased, £1 = $1.50, when house sold, £1 = $2.00? So those $$ repatriated to the UK would be worth a lot less than when the house was purchased ...

Would repatriation of the house sale proceeds at the poorer exchange rate be countable as a FX loss, offset against other taxes?

Pulaski

My recollection is that FX losses are not deductible for US tax purposes, which seems particularly unfair.

In contrast, there is a general principle in the UK, that any given gain is only taxable if a loss on the same activity would be allowable. So, when you discover that old Ferrari in the barn on the run-down farm that you bought "as is", the gain is tax free in the UK, because the LAST thing that the UKIRS wants is people deducting losses in the value of vehicles they own!

JAJ

This can be complicated or not, however you wish it to be.

I will simply observe that if the IRS tend not to audit these issues, you generally have more freedom to interpret the law in your favor. And after 3 years, (normally), the statute of limitations closes the year to any future review.

jmood

Sorry for being dumb. I don't quite understand. Are you saying that e.g. you had a 100K Sterling mortgage which was equivalent to (say) 170K US $ when you took it out. At the time it is paid off completely, if the exchange rate now makes the 100K Sterling worth (say) 150K US$, then there would be US tax to pay on the difference of (170-150) of 20K?

Is that "luck" considered "income"?

And what if that mortgage was paid off over the course of many years. How do you then calculate the so called gain?

And what if it is the reverse? What if your original Sterling mortgage is now worth more in US $s. Obviously you won't get tax credit for paying it off with funds from the US, right?

I don't understand the logic.

JAJ

A lot of theoretical discussion on this thread, not much discussion of what is actually enforced/expected. At a minimum, if you make regular capital payments you can exempt any gain less than $200 (and the IRS really aren't trying hard to enforce this.).

As to the rest, see post 16, a lot of the time a foreign currency can be claimed as functional, which removes the issue from consideration.

nun

You are not being dumb, you have understood the issue and make a good point about regular mortgage payments.

The IRS ruling mentioned is specifically for US citizens, I don't know if it would even apply if a foreign mortgage was purchased by an NRA in a functional currency other than the $ before becoming a US tax resident.

Currency gains less than $200 on personal transactions are not taxable so there would be little change of there being any tax due on regular mortgage payments and as JAL says even less chance of the IRS bothering about them.

Still, if you are a US citizen with a foreign mortgage the IRS ruling says you must pay tax on any foreign exchange "gain" you have when you pay the mortgage off. So it's probably best to avoid paying off a large foreign mortgage balance if the dollar has significantly appreciated against the mortgage currency.

yellowroom

Sorry to indulge in thread necromancy, but in preparing for this years tax return I realise may have inadvertently fallen foul of this rule.

I was in the US for just under 3 years on an L1 visa and returned to the UK at the end of July 2014. In August 2014, I paid off my UK mortgage using UK savings - they had been offsetting the interest for a while and I needed to take a loan out, and the bank said ok, as long as you pay off your mortgage first.

From the discussion above, I'm hoping I'll be able to rely on the fact I am not a US citizen and I ceased being resident in the US for tax purposes when I moved back to the UK (as told by my tax adviser on another matter before this cropped up), so the 'gain' happened when I was back in the UK.

Otherwise I owe the IRS in the region of $3-4k, and of course the exchange rate has changed enough since last summer that it would actually cost me more in ££ to pay the tax bill. The whole situation makes me very

If anyone is interested, I'll post here any updates when I'm doing my tax return - it's done as part of my relocation package with one of the big companies, I'm not keen on phoning up for a chat as I have communication issues with my contact (english not their first language).