Originally Posted by mrken30

Most States , maybe all , do not have a tax treaty with the UK

Originally Posted by H Bomb

That's not too bad then.

We kept our house in the UK in case we went back, however going back is now looking unlikely (at least for the foreseeable future). So we are just leaving it sitting there with tenants paying our mortgage.

We remortgaged to a better rate last year - but that only involved clicking a few buttons online with our current bank. They do know we no longer live in the house and that we do not even live in the country - but it seems departments do not speak to each other and as you say as long as you make the payments each month they do not really care.

Originally Posted by Pulaski

I don't know about you, but it is scaring me that you are asking these questions now, about things that you should have thought about before.

For starters, the method of financing the purchase has no bearing on the tax calculation for the property. Under US CGT there is also a possible taxable "gain" on the loan.

Under US tax law you are required to depreciate the property each year - by 2.5% of the value of the building (but not the land - a starting point to estimate this given that the land is not typically valued separately in the UK, is that the building is worth 80% of the purchase price, but less if the land has redevelopment potential) each year over the first 40 years of ownership. The effect of depreciation is to reduce the purchase price in the CGT calculation, so if you bought the property for £125,000 and owned it for ten years you would have depreciated £25,000 off the value (2.5% x 10 x 80% x £125,000), so if you sold for £125,000 after 10 years you would pay CGT on £25,000 (i.e. the amount depreciated) less any CGT paid to HMC&R which calculates CGT in a VERY different way.

Then the matter of US CGT on the loan. Suppose you borrowed £100,000 when the exhange rate was $2:£1 and over ten years paid off £20,000. When you sold after 10 years the exchange rate is $1.25:£1. The £80,000 left on the loan was originally worth $160,000, but at $1.25:£1 will only cost $100,000, to pay off, so from the perspective of the IRS you have profited by $60,000!

I strongly recommend that you find yourself an experienced tax accountant PDQ, and one who understands the tax issues of international real estate investments.

Originally Posted by TXLonghorn

If you sell it within 3 years from the date you stopped using it as your primary residence, the gain should be excluded under IRC 121.

I hope that you are reporting the rental property on the US return, especially since it seems that it is generating a loss (which could be used to offset other income, assuming you're not above the AGI threshold).

As others have said, the foreign tax credits should offset some or all of the US CGT when you sell it.