Leigh_A

Hey

My spouse was relocated from his company's London office to New York last March. We owned an property (in his sole name) that we sold to enable us to relocate to the US. We bought the property in June 2012 and after some delays from the buyer, it completed in April 2014 (a month after we arrived in the US).

We always naively assumed that because we were selling our home in which we were living at the time purely to move here, we would not be liable for any tax on the profit. It appears that we might have severely misjudged things, based on the advice of the firm preparing our first US tax returns.

Our tax advisor has informed us today that as we were not living in the property for at least 2 of the previous 5 years before the sale, it would definitely be taxable in the US.

My spouse's employer appointed the firm to complete our tax returns for our first year here and despite being one of the 'Big Four' firms, there have been multiple occasions where our advisor has stating something as fact, and after a bit of research online I have proven him to be incorrect (particularly around the taxation of same-sex married couples). I therefore take nothing he says as gospel...

Looking online, I can definitely see the '2 year out of 5' rule, but it reads a little blurred, like there can leeway in certain circumstances.

I was wondering whether anyone on here was in a similar situation when they left the UK and whether there is any hope at all of us not having to hand a huge chunk of the deposit for our next home to the IRS! (although I am preparing for the worse )

Pulaski

If you lived in it for two of the past five years and file your taxes jointly then the first $500,000 of any gain is not taxable, but as you weren't (living there long enough) it will be taxable.

I'm not aware of any blurriness or leeway. What do you think you see?

nun

For the tax year 2014 your husband was in the US from March until Dec 31... that's 337 days if he arrived March 1st or 307 if he arrived March 31st. Both of those numbers are greater than 183 so he was a US tax resident at the end of 2014. Therefore, he is a Dual-Status Alien, being non-Resident up to March and a US resident after that.

You lived in the house for 1 year and 10 months and it sold in April 2014, one month into the period where your husband is a US tax resident. So that means that when the house sold he was a US tax resident and had not lived in the house for 2 out of the previous 5 years. Therefore, you don't get the married $500k capital gains tax allowance and tax would normally be due on all the capital gain. However, you had to sell to move for work in the US and for that reason you might well get a partial exemption, look for "Work related exemption"

http://www.irs.gov/publications/p523...ublink10009003

here is a good explanation

http://www.bankrate.com/finance/taxe...ob-change.aspx

If you are having your taxes done by one of the "Big Four" they should know this stuff and work hard to get you some exemption and hopefully it will cover your whole capital gain.
I predict you should be able to exclude around $480k. If your CPA doesn't know this stuff.....ask for a new one. But it might be that he/she isn't asking the right questions and you aren't giving them the right info for them to type into the software. This is why tax can be so interesting, it really is so dependent on personal circumstances.

There is also the effect of interest rate changes between when the mortgage was originated and when it was paid off to consider too.

Leigh_A

Thank you both for your replies, much appreciated.

We certainly seem to meet the Work-Related Move condition, so there is hope after all! Our profit certainly falls well within the $480k predicted exclusion, and so it should provide more than enough of a buffer for any possible increases caused by the interest rate difference.

nun

Your CPA should have given you this information. Verify everything with a professional. I'm not a tax professional and this is a public forum. Talk to your CPA about the circumstances of your sale and let us know what he/she says about the work related exception.

Leigh_A

Hi Nun - I understand that and of course we will be speaking with our CPA to seek professional help. I just appreciate having a starting point for our discussion with him and a particular section of an IRS document to quote.

I will feedback once I have clarification from our CPA.

nun

It just seems as if your CPA isn't that sharp because he stated that you are definitely taxable on the capital gain because of the "2 out of 5" rule when he should be a ware that you had a work elated move and could apply for an exception. Keep asking questions!

Leigh_A

I quite agree - We're asking for a new CPA!

Cook_County

You should get a partial exemption; but the gain in dollars will not be the same as in pounds because of exchange rate movements. You may however have a currency gain on the mortgage so hopefully the CPA has discussed this with you also.

Leigh_A

Thanks for the explanation. Am I right in thinking that if the GBP->USR rate was higher when we sold the property than when we purchased, there would be no foreign exchange gain, as we technically paid the bank back more in dollars than we borrowed? (Obviously I will be going through our exact figures with our CPA for professional advice). I just want to check that my understanding of the foreign exchange gain taxation is correct.