cazzababes

Hi,

This is a Hypothetical scenario, but one I would like to explore. Please feel free to pick any holes on this scenario, taxes, income, CGT, inheritance or anything else ?

We are moving from London to the US on an E2 and we own a property in London which will be rented out @ 2400 GBP per month

1 )We will rent for the first year, which the rental income in London will cover. After a year (if we decide to stay) I would like to try and purchase a place for approx $400k
2) Hopefully at this stage myself and the wife have a reasonable income and our US earnings can pay the mortgage and give us a reasonable standard of life. The house in London will then start to pay itself off.
3) We owe 230k GBP, so after 9 years the house should be paid off
4) The house in London is now paid off and continues to be rented out.
5) The incoming rental payments are then sent to the US to pay off the house in the US.
6) After 12 years the house in the US is paid off.
7) The house in London becomes our pension pot, we continue to live in the US
8) We die and leave the houses equally to our 4 kids

Good or bad plan ?

Nutmegger

scrubbedexpat099

E2 is a temporary investor visa. you would need to find out how a legacy in the US would impact children living in the UK.

FatFrank

I am no expert, but here are my thoughts based on our experience. FWIW:

We are moving from London to the US on an E2 and we own a property in London which will be rented out @ 2400 GBP per month
- be prepared for a few months where you will receive no rental income. Even if the property is always rented, there is always maintenance surprises that which, especially with you not being there, cost more than you budget to fix. Every other year we seem to go through a 2 or 3 month patch with effectively zero rental income. You will also need landlords insurance and make sure that your mortgage holder doesn't want to crank your rate up when you rent the property from abroad.
- a positive (I think) here is the the "depreciation" and mortgage interest from your UK property being claimed/considered on your US tax return

1 )We will rent for the first year, which the rental income in London will cover. After a year (if we decide to stay) I would like to try and purchase a place for approx $400k
- Initiate a US credit history as soon as you land. Borrow, pay-off after a few moths, borrow at a lower rate, pay off. Gonna be hard to get a reasonable US mortgage after a year even with a one year US credit history. Maybe need some corporate or banking help?

2) Hopefully at this stage myself and the wife have a reasonable income and our US earnings can pay the mortgage and give us a reasonable standard of life. The house in London will then start to pay itself off.
- Yes, hopefully & see above.

3) We owe 230k GBP, so after 9 years the house should be paid off
- Should be ish. I haven't done the math, but looks like you likely have a reasonable interest rate?

4) The house in London is now paid off and continues to be rented out.
- and income from it will be taxed on your US return without any mortgage interest to offset it.

5) The incoming rental payments are then sent to the US to pay off the house in the US.
- with the federal tax deductions for mortgage interest, I can never figure out if it's actually advantageous or not to completely pay the whole house off? Wish I understood such things better

6) After 12 years the house in the US is paid off.
- always a good plan. Difficult to execute with college fees, exotic cars, and boats

7) The house in London becomes our pension pot, we continue to live in the US
- I am not sure about the ins and out of this should you pass, but we have kept one UK property to do the same, but also for piece of mind.There is something that feels good about having a landing pad back in the UK.

8) We die and leave the houses equally to our 4 kids
- Complicated. Situation probably different if you are US resident or citizen at the time and whether we are talking about US or UK property.. Hopefully someone here can chime in because I would like to know this too!

Good or bad plan ?
- I like your targeted fiscal discipline and keeping the UK property, assuming that you do keep it, This is only my personal opinion, but I think that's what you are asking for! Best really to find a US/UK financial advisory with such complexities. Especially as long terms plans can be affected by regulation changes over time.

- Other considerations are the tax on UK property sale for foreign landlords should you decide to keep the house but then sell it later, and also US CGT should you sell - especially with the exchange rate being so low at the moment (not sure when you bought the house but I believe the exchange at the time affects the calculation of CGT) which could change and give you an effective large on paper profit for CGT.

Not sure if my input helps, but it should at least give you food for thought and point you int the direction of further questions that you should ask.
Best, F

TexanScot

I've heard similar comments from American friends, and I'm not sure I really understand where they are coming from.

Yes there is a tax benefit in deducting mortgage interest, but in order to deduct mortgage interest you have to be paying it in the first place, and I'm not sure how having a debt that you're paying interest on is ever going to be better than not having any debt in the first place. The same people also tell me that I should have as big a mortgage as possible so that I can deduce more interest, which just seems completely nonsensical to me since all that means it that I have even more debt and interest that I'm voluntarily paying!

tht

Tax benefits aside, you have to look at it differently, say you have a balance of $100k left on the mortgage, and it's a 30 year rate of 3.5%, can you make a better return on that money elsewhere? You have to look at both sides of the ledger not just 1. Also the mortgage interest deduction is now capped along with SALT, but there may be instances where a high number is better to open up the itemized vs new higher standard deduction.

TexanScot

Sometimes it can be worth borrowing cheap money to "invest" in a house if you think that the capital gains will outperform what you would get investing that money somewhere like the stock market, but I'm yet to hear a single one of my American friends express it in terms such as that. All of them seem wedded to the tax deduction as the be all and end all, as if it was some magical thing that should be maximized at all costs.

You're not wrong, but that doesn't seem to be what they are getting at.


Given the high property taxes in Texas and the lack of income tax, in many cases it's still better to itemize than take the standard deduction (I know it is for me). I still don't see how voluntarily paying interest on a mortgage (deductible or not) is still better for me than not having a mortgage at all.

If I wanted to borrow cheap money to invest elsewhere I could still do that, and I'd be even better off doing it if I didn't have debt to service in order to cover my primary residence.

durham_lad

We did something similar when we first moved over on an E2 visa in 1987, then renewed it a couple of years before getting a Green Card. After 6 years renting it out, and a year after we had bought a house in the USA we got tired of the hassle of managing an overseas rental, sold the UK house and moved the funds to the USA where we invested the money in a mutual fund. (This was pre-internet so communication with the housing agent was phone, fax and letter).

I think your plan is good, certainly don't want to sell the UK house while on short term visas, and unless you have cash to buy you'd be hard pressed I think to get a mortgage on an E2 visa.

shorrock

Look into UK's overseas landlord tax. I believe then tenant or agent is responsible for collecting and submitting it. There are ways to minimize. But it could eat into the rental money quite a bit.

You will also have to pay tax on the income from it and any potential capital gains. Throw in a dose of FX money transfers and you could have less than you expect (or more).

If you are using an agent then expect to get 11 months out of 12 monies. Fees and costs typically add up to 1 months rent. This is outside of any maintenance.

tht

Not sure what you mean, the 2018 SALT deduction was capped at $10k, so even without a state income tax, if your property tax was $10k, $20k or $30k your salt deduction was still only $10k. I file NY/CT and ended up with the standard deduction for 2018 which was less than 50% of the 2017 itemised deduction was, granted it was somewhat offset by lower tax bracket.

Your unlikely to get money as cheap as a 30 year conforming US mortgage so the way to look at it is you suddenly get $100k and your mortgage balance is $120k and APR is 4%, do you pay it down to $20k to avoid $4k of interest on the $100k, of which you get back say $1400 as a tax credit assuming last $ and being in the $200-500k bracket of 35%. So the real calculation is can you earn more than $2600 a year on that $100k? In that scenario keeping the cash is better than paying off the debt upfront.

But as you say this is not how most Americans think about it, they think of it as win that you get money back from the IRS....

Morag McDoogal

It's not easy but is doable....I got mine through TD Bank, underwriting is a sea of paperwork though.

durham_lad

newadventure

Couple of other factors: liquidity - if things changed and you needed to get that $100K in your bank account quickly, it may (depending on where you invested it) be a lot quicker than remortgaging (and possibly incurring a higher interest rate). However, in the scenario where itemising saves you just as much as the standard deduction, you are getting no value from the mortgage interest rebate ie it is worthless

tht

Yes and if you prepay the mortgage it comes of the back end not the front, while most of the US mortgages I have seen don't have a penalty for this, that means if you miss a payment you are still behind.

I would have worded the second part slightly differently. If itemizing saves you as little as the standard deduction having the mortgage interest is not a benefit. But again the current SALT changes may not last 2 year....

When I brought my first place in the city it was actually because rent was getting too expensive, and deposit aside my monthly cost of interest/principle/tax/ and common charges was 30% cheaper than rent on a similar property.

newadventure

So the rate of return you need to get on your hypothetical $100K to make it worth investing rather than paying off mortgage is (mortgage rate - ((itemised amount - standard deduction)/$100K). Is that right? I've got Friday afternoon brain