Renting out USA home if I return to the UK?
 

Tried to look for a relevant thread...couldn't find one...apologies if this has already been covered!

Has anyone held onto a property they've bought in the USA after they leave the US?

I'm contemplating buying a property (in Chicago). Financially it all seems to make sense, with one outlier. I don't know for sure how long I'll be out here, where I'll go next etc. So, rather than selling the property after only a few years if I did leave, does anyone have any experience on the tax / financial implications of renting out a home in the USA when you return to the UK?

Presumably I'd have to file a USA tax return to cover the rental income? Would I get taxed twice? Are there any UK implications?

Or would it make sense, in an ideal world, to rent it out at a level that covers mortgage and all associated costs, but doesn't generate any significant income, so that the property covers its costs without generating a tax burden for me, with clearly the associated benefits of the mortgage being paid off and (hopefully) some capital gain?

Any input would be hugely appreciated!
Thanks

Re: Renting out USA home if I return to the UK?
 

I'm not sure of all the ins and outs but I wanted to mention one oddity that in some states the ownership of property can open you up to state income tax rules, i.e. they consider you 'resident' if you own property and have moved overseas. The rationale is that "you'll come back one day" and you need to pay for all the services that protected your investment while away (seriously). Many expats can get tripped up by that one.

Like I said--this is only with some state income tax rules, but the ownership of property is something to discuss with a professional, especially if you lived in that state or intend to return to that state from another country.

Re: Renting out USA home if I return to the UK?
 

This doesn't make any sense at all.

If you are getting sufficient income from the property to cover the mortgage as well as all other costs then you are already into the realms of "having a tax burden" so why wouldn't you just try to get as much income as possible from the property, pay the taxes, and pocket whatever is left?

Don't forget that repayment of the mortgage principal is not tax deductible and, by the time you are a non-resident and no longer living in the property, neither will the mortgage interest.

Re: Renting out USA home if I return to the UK?
 

Another thing is that if you lived in the property 2 of the previous 5 years, any capital gains up to $500,000 if married filing jointly and $250,000 for married filing separately or single is excluded from income. I'm not sure if the same rule applies if you leave the country and later sell so if even if you sell the property within 3 years, you may possibly not get the exclusion (check the tax laws on that).

After 3 years of being your primary residence for 2 years or more, 100% of the capital gains are taxable income when sold in either case.

Re: Renting out USA home if I return to the UK?
 

Something like this?
The Stickiness Of Domicile - Hard To Leave State Income Tax Behind - Forbes

Except, that it's hard to see how this could apply to someone who is not a U.S. citizen or green card holder. Such a person may have acquired state residence for the period of time for which he or she was living in the state, but domicile normally requires the intent and ability to remain indefinitely. Which does not apply to a non-U.S citizen/LPR.

But I would, in general, concur to take advice from a CPA/attorney who is experienced in the laws/practices of that particular state.

It is near-certain that the state will, at least, want a state non-resident tax return to report income from the rental property located in that state.


Mortgage interest should still be deductible as an expense against the rental income.


In general, there are a number of complications that will be involved in owning cross-border real estate. Assuming a non-U.S. citizen/green card holder, resident and domiciled in the U.K., owning property in Illinois, it includes the following:

- annual U.S. and Illinois non-resident income tax filing to report the rental as U.S./Illinois source income;
- a U.K. income tax return required to report the foreign income, and take credit for any U.S./Illinois tax.
- if the property is later sold, both the U.S. and U.K. will want to tax the gain and due to currency fluctuations or differences in tax rates, there is a risk of double taxation.
- possible tax withholding or special reporting at point of sale if a non-U.S. resident;
- the U.S. estate tax threshold for non-residents is relatively low, at $60k, so there is a risk of the estate paying tax later on (on U.S. sourced assets). There is a U.S./U.K. estate tax treaty but this may not necessarily remove the risk of double tax.
- there is also an estate tax in Illinois, although the threshold appears to be higher, this could change.

It would be essential to have a competent agent in place for day to day management of the property.

Re: Renting out USA home if I return to the UK?
 

Very much appreciate the help, thanks all.

Re: Renting out USA home if I return to the UK?
 

As JAJ noted, that is not correct. Also there is depreciation to deduct, and insurance costs, property taxes, management fees, repairs and maintenance. In practice it is quite possible to have no taxable income at all, at very least until there has been significant rental income inflation. .... Over time major repairs will generate additional depreciation too, for things such as a new roof, heating system or windows.

You may also want l look into holding the property in an LLC, to protect yourself from litigation risk. The LLC fees will generate another deductible expense too! :)

Re: Renting out USA home if I return to the UK?
 

Making sure that you can deal deduct as much as possible is, of course, something that you want to do. I was not aware that mortgage interest on a rental property was deductible - is that because it is treated as a business expense?

Re: Renting out USA home if I return to the UK?
 

Yes, renting property is a business for tax purposes. :) ...... 'Tis in the UK too, for the same reason.

A while back someone posted a question on BE because they were concerned that they weren't going to show enough taxable profit it they deducted their mortgage interest on a rental property. ..... They hadn't realised that, with all the other deductions a landlord can ( and in some cases must) make, in practice there is often no taxable profit. ...... Moreover there can actually be a tax loss which can in part, subject to certain restrictions, be set against personal income tax. :)

Re: Renting out USA home if I return to the UK?
 

That's correct. So it's deducted on Schedule E as a business expense, not as an itemized deduction on Schedule A.

Except that if, by that time, someone is back in the United Kingdom (U.K. domiciled, etc.) the British tax system does not normally recognize depreciation to the same extent. So taxable rental income for British purposes would likely be higher than the U.S. equivalent.

Wouldn't this greatly complicate the tax situation from a U.K. point of view, where instead of having a foreign rental property you would then own a controlled foreign corporation or equivalent which would in turn then own a foreign rental. How does HMRC view LLCs?

It's not clear that LLCs give as much protection from liability as some expect, and perhaps it would be simpler to buy the appropriate level of insurance (which should also be deductible).

Re: Renting out USA home if I return to the UK?
 

Agreed - though the conventional advice in the US is to hold rental property in an LLC. I agree to your other point too, that it will complicate the British tax situation, ..... so perhaps forget the LLC given its nebulous benefits. :unsure:

Also agreed re insurance, except would insert the word "additional": Insure the property, then add a personal liability umbrella policy.