drcharris

Hi all,

Apologies if this is answered elsewhere but my question seems to be un-Googleable.

I'm a US resident (Green Card holder) and a UK citizen. I'm resident in the US for tax purposes for 2013.

I have a house in the UK that I rent out. I do UK tax returns of course.

I'm doing my US tax return for 2013 and need to enter income/costs for the rental, as well as foreign (UK) tax paid. However I'm confused about the different tax years.

1) Since the US tax year is Jan-Dec, do I enter foreign income/costs on my US tax return for Jan-Dec 2013?
2) Since my UX tax year runs April-April, do I enter numbers for the foreign tax credit based on Apr 2012-Apr 2013?

Otherwise I see myself trying to work out partial/estimated tax payments for the months where those two periods don't overlap, which is...complicated.

Any advice from people in a similar situation?

thanks

Chris

JAJ

Are you liable for any U.K. tax on the rental profit? If it's just one property, the amount usually works out at zero after you claim the personal allowance (if you're a British or EEA state citizen, you normally get the allowance).

So if U.K. tax is zero, this greatly simplifies the U.S. foreign tax credit.

U.S. is calendar year so normally you take your rental income and expenses for the months concerned, January to December. Normally a cash basis is simplest, there is some IRS guidance on this. Whatever basis you choose, be consistent year to year.

Make sure you claim depreciation on your U.S. return, normally using a 40 year life on the value of the property excluding land.

drcharris

For UK 2012/2013 yes I am liable, as I had other UK income that year that put me past the allowance.

Thanks for the advice, I do intend to factor in depreciation. On the UK return I took the "wear and tear" deduction anyway, so it will probably cancel a lot of that out.

JAJ

In that case it's possible that the amounts are substantial and you probably need to use the services of a competent tax CPA to work out the foreign tax credit. It's probably an exercise in apportioning your U.K. income and taxes to the relevant U.S. tax years and income categories for form 1116.

Is this your first year of U.S. residence? If not, what was done last year.
If the other amounts are pension related (or otherwise covered by the tax treaty), you should perhaps be claiming exemption in the U.K. and paying tax only in the U.S.

You should be aware that what you claim in depreciation in the U.S. will be recaptured and taxed at a rate of 25% rather than the standard capital gains tax rate, if/when you sell the property. It's not the same as the U.K. wear and tear allowance. I thought the rental had to be furnished in order to claim that?

Also ensure you are complying with U.S. foreign asset reporting, especially FBAR and form 8938. There are other foreign reporting situations, for example, if you hold a 10%+ share in a foreign corporation.

drcharris

Yes the rental is furnished, hence the "wear and tear" deduction I'm able to take in the UK.

You're right that consistency with last year is important - I don't want to 'skip' 8 months' income! Last year my return was done by Ernst & Young as an employer perk but the level of transparency left a lot to be desired. I've got an inquiry out with them now, and will report back here once I get a reply on their methodology - might help others in the same spot.

The house is now my only foreign interest and I keep my bank account in the UK low (under the FBAR threshold) but will report it anyway.

The house is now up for sale, so next year's return will see a lot of fun wrt capital gains - I won't be liable in the UK but will in the US, but should get the deduction as it was my main residence within the last 3 years.

Thanks for the advice.

FatFrank

I have owned a house in the UK and rented it out for years whilst being a US resident. There has never really been any UK tax due, but all the same my UK and US returns have each had different calculation of profit/loss etc as my US returns have always considered the rental income, maintenance, and mortgage interest etc from January to December, whilst the UK returns April to March.

I'm not saying that's right or wrong, just what I have done......

I too think I am finally going to sell (have considered it before)...should be interesting.

drcharris

So I said I'd come back after talking with my previous accountant. And yes, the advice in this thread is absolutely correct - for the US tax return you take all the UK income and all the costs (including UK tax paid/refund) for the calendar year and declare all that in the US return. The overlap in the tax years, then, means that Jan-Apr UK costs and taxes get figured into both tax returns for that year, but it all balances out in the following year's returns.

Guess I was overthinking it a little bit, the principle is quite clear, but it's nice to have it explicit.