Lesley Chow

Hey guys, hope you are all well. Just getting ready to make the jump over to start my new life. Quick question regarding tax in the UK and the US. So my employment will be in the US and salaried there of course, straight forward. Where I seem to be reading conflicting information is around the 2 homes I will rent out back in the UK. Will I need to pay tax in the US for these or in both countries? I think I have went down a rabbit hole and spun myself but would appreciate any advice from people here.

Cheers

Pulaski

Please take a look at this very recent thread, which I think answers all your questions and more, but in short, unless you are planning to return to the UK in future to live, and not become a US citizen, which would commit you permanently to pay US taxes no matter where in the world you live, you would be well advised to sell up now to avoid the tax issues and some potentially large tax bills if you ever decide to sell the properties.

Lesley Chow

Thanks Pulaski. Say for my situation I was to go for a 5 year dance in the US and wanted to keep them as a safety net or return option, how does it work in terms of the rental outcome I will get from them? They just cover my mortgage payments and no more and could not get my head around being double taxed for them in both countries.

Appreciate the response.

Pulaski

You'll need to complete tax returns in both countries, and also a state tax return in the US. Income tax in the US on your rentals is likely to be lower than in the UK*, and as you will get a credit against your feredal taxes for tax paid in the UK you probably won't have any federal income tax to pay in the US.

* US income tax on rentals is lower because you can deduct pretty much everything you spend from your rental income - repairs, maintenance, management fees, insurance, property taxes (if any), advertizing, legal fees, etc., and you even deduct depreciation (that is mandatory, not optional) at a rate of 2.5% per year, (straight line depreciation over 40 years) on the value of the building (but not the land), where a typical estimate of the building value would be 80% of the value of the total property, adjusted for higher value of land closer to a city center or perhaps zero if the land is leased not owned e.g. for a flat.

Lesley Chow

Appreciate the advice. So it would be in my best interests to go as is then considering I am not looking at this as a full time move? I guess maybe further down the line I might love it and go for the green card and can cross other bridges when/if I come to them.

Cheers

Pulaski

Yes, just be aware that getting a green card, could make selling the properties very expensive, with resepct to capital gains taxes, and that Uncle Sam taxes capital gains from your date of purchase, not from when you became subject to US taxes, and doesn't have indexation allowance either. From a tax perspective, owning the properties until you die will become a good tax strategy as your heirs will get a "free uplift" to market value, under both the (current) US and UK tax regimes.

Lesley Chow

Makes sense. I guess that would be the goal in the long run unless I get giddy and want to go for one last dance and blow the lot.

Capital gains above the purchase price or on the whole amount regardless?

Cheers

Pulaski

Over purchase price PLUS depreciation claw-back. If you invest in a rental property (i.e. never live in it yourself) for $250k, with $200k being the value of the building and sell it after 20 years for $475k, there will be a taxable gain of $225k, and you will have depreciated 2.5% x 20 years x $200k = $100k, so there will also be a depreciation claw-back on $100k, which I think is like CGT, but I believe goes on a different part of your tax return.

There is also the possibility under the US tax code to roll-over a taxable gain into a "similar" property using a "1031 exchange".

durham_lad

You also have to use something like xe.com to look up historical exchange rates to determine the $ value of the house purchased, then again on the date it is sold. If the exchange rates go in the wrong direction you find a much larger capital gain than you might expect.

I'm in the situation of being a USC living in the UK. Selling US shares each year is similar, I must use the exchange rate on the dates of purchase and sale to determine the capital gain in £s.

Pulaski

Depending on exchange rate movements, there may also be a gain taxable in the US on redeeming a mortgage early.

durham_lad

Yes, mortgages complicate matters even more when houses are sold.

civilservant

Geez

Remind me to never even consider a rental property as an investment strategy and to stick with the stock market!

Lesley Chow

I beg to differ given the current climate...........

civilservant

The current climate will abate, like it always does (and BTW, the DOW & S&P 500 have nearly reversed their losses from this year)

I have 30 years, at least. to retirement, so I am not worried about it for the here and now. Despite it's issues, the US economy is fundamentally strong.

S Folinsky

The issues are complicated. I would strongly suggest consultation with a US tax lawyer or CPA (“Chartered Accountant” in UK-speak) conversant in the issues.

With knowledge of the laws and your particular situation, you will be able to make reasoned decisions.