expatDC

Hello,
Myself (USC) and wife (green card) will be relocating to US and renting out our london flat. We will not have to pay taxes in the UK as our tax free allowance will cover most of our rental income. However, as we will have to declare this as income in the US, will we effectively pay state and federal income taxes on it?

I realise you can deduct mortgage interest, management fees and depreciation, but I doubt these will exceed our standard deductions by much (which will add up to around $20k in 2018 I believe). So effectively will we pay full income tax on our entire rental income despite having to pay mortgage costs and management costs on the property? The standard deduction would obviously reduce our tax liability on our US salaries otherwise as well. Seems fairly absurd!

Thanks

Cook_County

With a 30 year depreciation life on the building and a mortgage it is highly unlikely there will be a taxable profit in the United States. Would you care to share some estimated numbers?

expatDC

So if I have 20k rental income, 10k of mortgage interest payments and another 10k of depreciation I can fully offset my UK rental income. But doesn't that mean I then lose my standard deduction? If I didn't have the UK rental income, I could use the standard deduction to offset my US income tax liabilities.
So effectively, I am paying more US income tax due to having UK rental income, broadly on the full amount of my rental income (since my wife and my own standard deductions will add up to around 20k as well and will now be lost).

I may be misunderstanding how the deductions system works. I have not lived in the US since I was at school so I only ever file with a simple foreign earned income exclusion, and don't have to use deductions.

Cook_County

Sounds like electing to claim the foreign earned income exclusion may not have produced the optimum result as you won't have enough/any excess foreign tax credits.

expatDC

I won't be taking the foreign income exclusion when I live in the US, because I will have a US salary at that point. I also won't be paying any taxes in the UK on my rental income because I actually can deduct interest payments and use my tax free allowance to offset these. So I won't be able to use UK tax payments to offset my US tax liability.

The only way I see to offset paying US tax on UK rental income is if you are already using itemised deductions for other items. Then you are increasing your deductions instead cancelling your ability to take the $10,000 standard deduction. But who would be doing this anymore? - the Trump tax reforms shift almost everyone on to standardised deductions.

It's just absurd to have to pay tax in the US on the full amount of my UK rental income despite the fact I am bearing substantial mortgage interest and management fees, and it will be my only owned home.

expatDC

Sorry I have answered my own question but may be helpful for others moving to the US and renting out their home!

If you are deducting interest on the mortgage of the home you live in, you lose your standard deduction. But you can deduct interest and other expenses on a home you rent out without giving up your standard deduction! When filling in schedule E to report rental income, deductions from interest and amortisation etc go on the same form. You only report net rental income on 1040 after these.

I found this helpful: https ://finance.zacks.com/line-use-file-mortgage-interest-form-1040-6622.html

Cook_County

And then you'd also want to learn a little about section 469(j)(7) in case this improves the answer.