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Rental income as 'Non resident landlord' and US taxes

Rental income as 'Non resident landlord' and US taxes

Old Feb 5th 2014, 4:48 pm
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Default Rental income as 'Non resident landlord' and US taxes

Apologies in advance as this is probably a daft question, but the more I research the less I understand...here's our situation :

We jointly own a house in UK and registered with HMRC as non resident landlord, so won't need to pay taxes

After the hike in mortgage fees (under 3 year consent to let), and the deduction of management fees from rental income, we cover £370 per month, so are making a hefty loss - and that doesn't even include any maintenance or repairs

My question is - we've just had taxes done at H&R block and were told that if we made a profit, we would be taxed on it. As we've made a loss that will offset any future taxes on the sale of the property. But here's my confusion, does this mean a reduction in capital gains tax on future sale of property? As I understand it if we sold the house before 3 years residency (which my husband is reluctant to do) there would be no tax, as would fall under the $500k exclusion........so as we are making such heavy losses, and if I'm reading it right the capital gains maxes out at 15%, we might have neglible tax even if selling after 3 years residency

I'm questioning it as our tax professional seemed really unsure on so many things and I don't feel very confident now in the advice given (any time your tax professional asks "I'm not sure, what do you think" and then when you say you don't know, they get out a manual and read for the next 10 mins, its very unnerving!)

I guess it just seems unfair that we would be taxed if making any money, but there's no relief in making a loss.
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Old Feb 5th 2014, 4:53 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

I don't know either, but the difference between your H&R Blockhead and me is that I will admit it and won't attempt to construct documentation to present to the government that proves I'm incompetent.

Please try to find a CPA with experience in the sort of filing you need to do. I paid for a fairly high-powered one here in Houston, and he did a great job and saved me much more than his fee.
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Old Feb 5th 2014, 5:06 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

Originally Posted by Speedwell View Post
I don't know either, but the difference between your H&R Blockhead and me is that I will admit it and won't attempt to construct documentation to present to the government that proves I'm incompetent.

Please try to find a CPA with experience in the sort of filing you need to do. I paid for a fairly high-powered one here in Houston, and he did a great job and saved me much more than his fee.
Lol. Unfortunately I thought I HAD found someone qualified as I went through H&R block website and requested someone that was listed as 'master' level, with over 30 years experience and one of the specialties listed was dealing with foreign income - but having sat through a 2 and a half session where she seemed as clueless as us on anything that wasn't "standard" I have very little faith in them. On the plus side we paid the extra $39 peace of mind insurance, so any mistakes will be paid for by H&R block

How did you find your CPA, and what do they charge, if you don't mind me asking? I think this is the route we need to take....
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Old Feb 5th 2014, 5:34 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

Originally Posted by Bendex View Post
Lol. Unfortunately I thought I HAD found someone qualified as I went through H&R block website and requested someone that was listed as 'master' level, with over 30 years experience and one of the specialties listed was dealing with foreign income - but having sat through a 2 and a half session where she seemed as clueless as us on anything that wasn't "standard" I have very little faith in them. On the plus side we paid the extra $39 peace of mind insurance, so any mistakes will be paid for by H&R block

How did you find your CPA, and what do they charge, if you don't mind me asking? I think this is the route we need to take....
I work for a multinational company, so I asked around at work. We have a lot of expats so they were able to steer me to someone nearby with the proper amount of expertise. The CPA charged me about 900 dollars to file a return with a tricky commodity sale issue and my non-resident husband filing as resident, and I think I got a bit of a discount because I had done half the work already and just needed a bit of straightening out, and because I wasn't a CEO client.
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Old Feb 5th 2014, 5:53 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

H&R generally aren't accountants but tax prepares. It's better they say they don't know and try to research it than blag it.

You do know about the change in the UK regarding capital gains and how you've got less time to flog the place to avoid paying UK capital gains? It was mentioned in a little more detail in one of the numerous recent tax threads yesterday, I forget which one exactly.
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Old Feb 5th 2014, 5:59 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

Originally Posted by Bendex View Post
On the plus side we paid the extra $39 peace of mind insurance, so any mistakes will be paid for by H&R block
You have to pay to insure yourself against them being crap? We do use H&R Block for ours, but they're much more simple. If I was dealing with foreign income I would definitely want someone with more experience.
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Old Feb 5th 2014, 6:07 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

Originally Posted by Bob View Post
H&R generally aren't accountants but tax prepares. It's better they say they don't know and try to research it than blag it.

You do know about the change in the UK regarding capital gains and how you've got less time to flog the place to avoid paying UK capital gains? It was mentioned in a little more detail in one of the numerous recent tax threads yesterday, I forget which one exactly.
The lady we requested was supposedly a CPA level, but I'm now trying to research alternatives for next year

I saw mention of changes in UK capital gains tax starting in 2015, but not actually what it was all about
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Old Feb 5th 2014, 7:25 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

Not sure I completely understand what you are asking, but it sounds a little like the situation I exerienced with my UK BTL disaster. I made a £40k net loss when I sold it. The below is what I was told by an accountant:

If you make a capital gain when you sell a BTL, you may be subject to capital gains tax.

If you make a capital loss, you can only offset it against other capital gains, but not against other income (e.g., salary).

Is that what you are asking?
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Old Feb 5th 2014, 8:21 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

Originally Posted by Bendex View Post
The lady we requested was supposedly a CPA level, but I'm now trying to research alternatives for next year

I saw mention of changes in UK capital gains tax starting in 2015, but not actually what it was all about
She either is one or isn't. Unless they're managing the place, chances are they might not have been very good in the first place.

As for the capital gains, the 3 year length drops to 18 months from this April I believe, but the rest of it kicks in next year. Anyway, someone posted an explanation of it in one of the other threads, of which, I still don't really know the details, but then I don't care as I don't own property so it doesn't affect me.
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Old Feb 5th 2014, 9:34 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

There appear to be different rules depending on whether the foreign (UK in this case) property has ever been classified as your main residence at any point.

If the UK property has been your main home in the past, there are new rules regarding capital gains coming into effect this April (2014).

If the property has not been your main home, but is purely an investment, there are new rules coming into effect in 2015 with regards to capital gains.

http://www.hmrc.gov.uk/cgt/property/reliefs.htm

The link above gives some information.
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Old Feb 5th 2014, 10:27 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

So...did the expert at H & R talk to you about depreciation recapture? Have you depreciated the building over 40 years straight line (but not the land)? Did the expert suggest claiming the mortgage interest under section 469(j)(7) to reduce your tax currently? You may just not have the optimum current answer in the US.

Suspended passive losses, if any, are indeed allowed against other income in the year of sale.
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Old Feb 5th 2014, 10:32 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

Originally Posted by Cook_County View Post
So...did the expert at H & R talk to you about depreciation recapture? Have you depreciated the building over 40 years straight line (but not the land)? Did the expert suggest claiming the mortgage interest under section 469(j)(7) to reduce your tax currently? You may just not have the optimum current answer in the US.

Suspended passive losses, if any, are indeed allowed against other income in the year of sale.
She said something abut depreciating the land (at 10% of the value of house purchase) and she took the figures for interest paid on the mortgage. Basically said that we had a loss of about $8500 but it didn't give us any USA tax benefit now, but will do against any future tax on the sale of the property. She said we would only benefit from this loss, in tax terms, if we were real estate professionals, which we are not. So my understanding is that if we made money we would be taxed now, but as we made a loss we will maybe get a tax break at some future point in time. Which seems unfair somehow
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Old Feb 5th 2014, 11:03 pm
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Default Re: Rental income as 'Non resident landlord' and US taxes

Originally Posted by Bendex View Post
She said something abut depreciating the land (at 10% of the value of house purchase) and she took the figures for interest paid on the mortgage. Basically said that we had a loss of about $8500 but it didn't give us any USA tax benefit now, but will do against any future tax on the sale of the property. She said we would only benefit from this loss, in tax terms, if we were real estate professionals, which we are not. So my understanding is that if we made money we would be taxed now, but as we made a loss we will maybe get a tax break at some future point in time. Which seems unfair somehow
That's how I felt too (see Post #8), especially as the CGT allowance is higher than any capital gain I will ever have in a given year. It seems to be the sort of thing that benefits serious investors, not tiddlers like us.
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Old Feb 6th 2014, 2:22 am
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Default Re: Rental income as 'Non resident landlord' and US taxes

Originally Posted by Bendex View Post
My question is - we've just had taxes done at H&R block and were told that if we made a profit, we would be taxed on it. As we've made a loss that will offset any future taxes on the sale of the property. But here's my confusion, does this mean a reduction in capital gains tax on future sale of property? As I understand it if we sold the house before 3 years residency (which my husband is reluctant to do) there would be no tax, as would fall under the $500k exclusion........so as we are making such heavy losses, and if I'm reading it right the capital gains maxes out at 15%, we might have neglible tax even if selling after 3 years residency
Bendex,
Check out this string from last year that best guesses the taxes and gains for selling my UK rental property that used to be my primary residence. It might shed done light on the US CGT and the reduction in US CGT due to the loss offset that has built up over the years that we have let it.

http://britishexpats.com/forum/showt...6#post10477096
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Old Feb 6th 2014, 3:53 am
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Default Re: Rental income as 'Non resident landlord' and US taxes

DO NOT RELY ON THIS, but this is roughly how it works for US properties - I don't know what special rules apply for properties overseas:

If the rental income is a passive loss (which it is likely to be if you are living here and the house is in the UK) then you can only get a benefit off that loss if you have a passive gain to subtract it from (for example if you had another rental house that made a profit).

If you have no passive gain to subtract it from the amount of the loss is carried forward to the next year as a passive activity loss carryover, and then if you make a gain on passive income next year then you can subtract the carryover amount from that.

This carries on year after year - passing on any passive activity loss carryover - until the carryover is used up or you sell the house. If you sell then any remaining carryover losses can used to reduce a gain on the sale of the house (if there is one - if there isn't I don't know what happens).

Remember the $500,000 exclusion of gain from sale of a house only applies subject to ownership and use tests (you must have lived in the house 2yrs out of the last 5yrs I think - but you'd want to check that) and also you can't use the exclusion if you've excluded the amount on another home (e.g. if you bought a house in the US and sold it at a gain).

Again, don't rely on this!
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