danicrun

I moved to sunny California in 2008 and am finishing off my 2008 US (Federal & State) tax returns after being granted an extension.

I've been told by my accountant here that in California, I have pay California State tax on any profit made from my UK rental property, even though any profit will already have been taxed in the UK through self-assessment.

The Federal return doesn't need worldwide income reported, but the California State tax return does.

Anyone else come across this? Surely I can't be double taxed?

Cape Blue

My understanding is that you need to add the income from your UK rental to your US income and any UK costs (including depreciation) to your US costs, before being taxed both Federally and by State.

What you can do is also record the last UK tax payment you made and add this to your US return to show tax already paid - this removes the double taxation but does have the effect of losing your UK tax-free allowance.

This is what happens in a normal year when you have been living in the US all year.

Giantaxe

Typically - subject to part-year caveats - a federal return does need worldwide income reported. However, you will get a foreign tax credit for tax paid to the UK. Unfortunately, California doesn't provide any kind of credit for foreign taxes paid.

oldskool

You do not need to pay tax in the UK if you are resident over here. There is an opt out scheme. I can't remember what it is called, but any property rental agency knows this and should have the correct forms.

We rent out our old house back in old blighty and we do this.

But yes, if you do pay the tax in the UK you get a credit on the US return. Yes, you have to pay tax on the income. But you do get to offset the expenses too.

Bear in mind if you sell the property and haven't lived in it for two years you have to pay US capital gains.

emailrob

iirc US capital gain ceilings are pretty high (something like $300,000 gain) between purchase price and sale price. In this market, I doubt many have made gains like that. I know I haven't!)

This means you are paid net of UK tax, and are responsible for any taxation, wherever that may be).

Guidance from HMRC below

http://www.hmrc.gov.uk/cnr/nr_landlords.htm

danicrun

Thanks everyone for the replies.

2008 was my first tax year here in the US, so was still considered a UK resident as I'm under 183 days, not one complete tax year etc (but yes have already enrolled in NRL scheme)

When doing my US returns for the first time, it sounds like I'm taxed in the US on my worldwide income (which includes UK rental income and costs), not just on my US salary.

For Federal taxes, I get a credit equal to the taxes paid against my UK return but for California (CA) I'm taxed again at California rates, should I be making a profit, or can utilise a 'passive loss' if I'm not profitable (which appears to be correct based on what everyone's written).

My UK accountant suggested that I should claim this CA tax as a deduction in the UK. Sounds like robbing Peter to pay Paul to me (or Gordon to pay Barak)

oldskool

It would be easy for someone who has owned a property over a longer period to still be making a sizeable gain, even with current conditions and especially taking into the account the currency conversion rate.

The ceilings only apply if you have lived in the house for the last two years, or if you have some other 'safe harbor' as they call it over here.

Someone who is likely to sell the property 3-5 years out, may actually be better off selling while they still have a safe harbor and avoiding future taxation all together.