RonGsy

Hello everyone,

I was wondering whether anyone was aware of how the US handle renting out a property in Britain. I live in Guernsey (which isn't in the UK) and my visa application for an H1-B is currently being processed. I'll be renting out my home, however we won't be making any profit whatsoever, and it'll be an interest only mortgage as this is all we are allowed (we figured a zero-loss zero-gain for the meantime would be the best option as it's extremely difficult to get on the property ladder over here).

How do the US handle this? I've heard they charge 40% tax on ANY offshore income, but do they handle outcome too? Is it only profit they tax on? It would seem rather absurd if I were charged 40% tax on something where I was breaking even every month (the rent value is equivalent to the mortgage repayments).

Many thanks in advance.

Speedwell

There's a cutoff for foreign income before any is taxed, something like 95K USD. You file a form called a "foreign income exclusion". I know that regular income from a job and government benefits are both covered by the exclusion, and I have not heard that income from consultancy or your own business or renting your house out isn't covered. You might want to call a tax attorney who is thoroughly familiar with immigrant tax issues (most are not) for a consultation to first answer your questions and then decide if you have any special considerations, such as US income that you must also declare.

I stress that the attorney needs to be experienced in immigrant tax issues; I've been seeing a lot of malpractice like telling US citizens considered married in 2012 by IRS rules to file as single if the foreign spouse is still overseas in visa proceedings.

RonGsy

So anything below $95k isn't taxed, do you mean? Cut-off indicates to me that's the point you're taxed "up to" meaning... everything Of course I'd get professional advice, too, but first wanted to see if anyone here had experienced this same issue.

Pulaski

Even if there was no "foreign income exclusion", the most you would ever be taxed on is your profit i.e. income less expenses, including: mortgage interest, agents fees, repairs, maintenance, property taxes, and last but not least depreciation, being usually almost 4% (1/26.5) of the price paid for the building i.e. excl the value of the land. In short, it is unlikely you would be paying any tax for years even with steady rent inflation.

Speedwell

Yes, it's the "foreign income exclusion", which means anything up to the figure is excluded from being taxed, subject to a few rules. You are still responsible for filing appropriate taxes in the country in which the income is earned.

My husband and I had to file this with our 2012 taxes because even though he is a non-resident alien, we chose to file "married filing jointly" and his income was treated as a resident's for tax purposes. For us it made the difference between paying thousands or getting a significant return.

Mr Weeze

There is a section on the federal tax return for rental income (http://www.irs.gov/pub/irs-pdf/p527.pdf) but given what you outline I don't think you will be practically affected on a federal level - as Pulaski outlines, there are more than enough deductions (the biggie being mortgage interest) to make this not a concern.

I have no idea whether there is any state requirement in Ca though.

RonGsy

Which would, I believe, be negative each month. I know it sounds silly, but property investment is a very big thing in Guernsey. We're paying an interest-only mortgage from when we leave (only option we have, we've paid capital over the last few years). The idea is to make zero-loss zero-gain, but ultimately if there's any maintenance that needs doing at any point then we would have made a loss for the the year (rent matches the mortgage, you see).

That's really useful to know, though.

RonGsy

The interest would match the rent in my case, so as you say, it shouldn't be a concern.

TimNiceBut

If you have an interest-only mortgage and the rent matches the mortgage, you *will* make a loss for US tax purposes once you add in allowable expenses.

Having just gone through this - I finally sold my house in Kent last November - I would strongly recommend that you find a good CPA over here who knows how to handle foreign income rather than go to the usual tax preparers that bombard you with advertising this time of the year.

RonGsy

What allowable expenses do you talk of? Is there any way of *not* making any loss?

TimNiceBut

Pulaski already listed the main ones apart from insurance (that's also an allowable expense).

The only way to not make a loss is to charge enough rent to cover all the expenses associated with the house rather than just about enough to cover the mortgage. After all, it is a business once you start renting it out.

Pulaski

Michael

I think you are getting things a little backwards. The foreign earned income exclusion is for USC's, LPR's, and someone who is married to a USC that wants to be taxed by the IRS similar to a USC or LPR that is living overseas. First the exclusion is only on "earned income" and not "unearned income" and secondly the person must be living overseas which is not what the OP is considering (he will be living in the US).

The primary purpose of the exclusion is that Americans are taxed on worldwide income and the exclusion is sometimes used (doesn't have to be used) before an American has to use foreign tax credits to offset any US taxes owed on foreign income. In the case of your husband, he could exclude his income so that you could file married filing jointly getting more exemptions, a higher standard deduction, and a lower tax rate on your income. Instead of taking the exclusion, he could have just used foreign tax credit to offset any possible US taxes that he would owe but the result would likely be the same.

Once someone enters the US, there is no foreign income exclusion and foreign tax credits must be taken to offset US taxes owed.

RonGsy

Yes, moving from Guernsey, Channel Islands, to California (on an H1-B for work).

Speedwell

I see what you're saying. Thanks very much for the clarification.