Ferrino

Hi. I'm a UK citizen living in the USA and I'm about to start receiving income for a UK property which is rented out through an agency. I am looking for some advice on how I should handle this new source of foreign income, please.

At the UK end
I understand that I can either have tax deducted by my agency (at a basic rate of 20%) or I can "opt out" and receive the full rental income, on the condition that I complete a tax self-assessment each year. Total income will be in the ballpark of 7,000 GBP per year and I have no other income from the UK, so I guess this will put me under the annual allowance for a UK citizen and would require no tax payment upon completing self-assessment.

At the US end
If I do receive my full rental income in the UK, I still need to declare this income on my US tax return, right? And I will then be taxed on the 7,000 GBP based on my US tax rate?

Alternatively, if I were to pay at the basic rate in the UK, I would still declare it on my US return, but the IRS would deduct the 20% already paid in the UK.

Thanks for any help you can give!

Michael

You can't decide by which government you want to be taxed by but instead that is defined in tax laws or tax treaties. If you do it wrong, you can end up paying double taxation.

I believe for foreign rental property, US residents must report that income as US taxable income and normally can't use tax credits if a foreign government taxes that income. For US taxes, mortgage interest, insurance, maintenance, management fees, and depreciation is deducted to determine the income. However if the property is sold, the depreciation is recaptured at a 25% capital gains tax rate.

Pulaski

It will be on your US tax return regardless of what happens in the UK.
Property taxes are also deductible. Depreciation is straight line over 40 years for foreign property, on the value of the buildings i.e. excluding the value of the land.

Ferrino

So do you recommend that I have the full amount deposited each month and then pay all the taxes in the US? I understood that because the total rental income is below my personal allowance in the UK, I would not be required to pay any tax in the UK.

HartleyHare

We (me and husband) are currently in the US and let our UK property out. Our property is in England - I think there may be different rules for Scotland and NI.

Here's the details from HMRC:
https://www.gov.uk/renting-out-a-property/paying-tax

When we left the UK we completed form P85 here:
https://www.gov.uk/government/public...-tax-right-p85

As we own the property jointly we both have to complete a UK self assessment. We were able to do this via the HMRC online service.

As our yearly rental income is under our UK personal allowance we do not have any UK tax liability. The rent is paid into our UK bank accounts and we just leave it there as we are only in the US on a temporary contract.

The rental income is included on our US tax returns and taxed accordingly.

Ferrino

Thanks HartleyHare!

The property does not have a mortgage and the renters are paying property tax (council tax), so when I come to declaring it on my US return, I understand from this thread that I am able to deduct the following:

HartleyHare

You can pretty much deduct exactly the same expenses as you would for your UK tax return.

This is the IRS guidance for property expenses:
Publication 527 (2014), Residential Rental Property

Just make sure that you understand how to value your property for the depreciation. I know that Pulaski has pointed out that it"s just the building you need to value and depreciate - not the land. There is a whole section in the IRS document explaining how to calculate your property "basis".

Ferrino

Thanks for all your help! My next question is: can all these details concerning a foreign property be handled by tax software such as H&R Block? Or do you really need to file through a professional when you are receiving rental income and listing all the deductions, like depreciation etc?

Ferrino

OK, it's getting close to tax return time and this will be the first time I'm declaring income from our UK property. Can I report property-based income using the typical tax return software or should this really be handled by a professional?

Also, it's still unclear to me if there is a chance of being "double-taxed" in the UK and USA. Is there not a treaty in place between these 2 countries that prevents this?

Many thanks.

Pulaski

I would be sceptical that tax software can handle overseas investment property correctly.

And yes, you do not pay tax in both countries. You get a tax credit for any tax you are forced to pay in the UK against any tax assessed by the US. Given the difference in the tax years between the US and the UK, if you are expecting to have tax to pay in the UK and won't have that number finalized until after April 5th then you will probably have to file for an extension (on the due date for completing you tax return) in the US. It is easy and gives you upto six more months, but if you know you owe tax in the US you should pay the estimated amount before April 15 to avoid penalties.

FatFrank

Ferrino,
Looks like you are in a similar situation to many of us that live in the US but rent out a UK. Property. It is also that time of year for me, as I am about to complete and file my UK return for year to April 2015 (IIRC it has to be done by the end of this month), and have been on the phone to the mortgage company getting 2014-15 tax year interest paid figures just this morning

Anyway, I complete my UK return myself as it is relatively simple (compared to the US return IMO), although the first few years my company did it for me (and I have learnt a lot from the boxes that they ticked!) The UK return has a UK property supplement that I complete each year. In the supplement I just enter rent received, any mortgage interest or other fees associated with the property for the associated tax year, and the 'adjusted profit for the year' is calculated . This 'adjusted profit' has always been below my personal allowance, and my actual income goes on my US Tax return, so I have ended up paying no UK tax on this income.

Now, my (and your) US return is a different story but I have an accountant for that as it gets really complicated with purchase price, 25 year depreciation, and a whole host of other things complicating matters. We also sold one of our UK properties this last year, so my next tax returns may not be so easy (or pleasant )

Pulaski

If your accountant is using "25 year" depreciation on property in the UK, you need to have a word with him/her!

Overseas property is depreciated over 40 years.

FWIW US property is depreciated over 26.5 years.

Tirytory

So I've done my self assessment already this year as I rent a house out too. I used one of the software listed (ABC I think) to complete the relevant forms. If you live abroad you can't just use Self Assessment,you have to complete additional remittance forms also. Also I'm fairly sure you're not entitled to a personal allowance. I had to pay tax this year and I wouldn't have needed to if I had a personal allowance.

FatFrank

Pulaski, I will check. He probably is using 40 years, just my memory that's at fault.

FatFrank

Tirytory,
Yes, I/we use the Andica software for our UK return self assessments. I also complete the Residence and Remittance basis/allowance supplements. In that I mark that I was not resident in the UK for the tax year, that I had a home overseas, and that I am entitled to claim the personal allowance as a non resident, resident in the USA for tax purposes etc,......

This is how both PWC and Deloitte have previously completed my UK return when they were contracted to do that for me...?