Sq25394

Hello all,

We moved over here 15 months ago and just got our GCs.

we’re renting a house waiting for values to go down, credit score to go up and obviously watch interest rates do their thing.

ww are renting out our UK home and this is our only property. The property is leased out through Apr 2024.

I’m already thinking ahead to sell the house in early 2024 to release capital come the time but am concerned that I’ll have to pay capital gains tax on my primary abode (UK there is no tax for this). I bought the house in 2009 and had it valued the day we left for the US.

do I have to pay tax on the value of the Josie when I bought it or when I became responsible for paying US tax? Any advice on being tax efficient here including continuing to rent it?

many thanks.

Edit: just read this post
Keeping UK property while living in the USA

Glasgow Girl

Regarding US capital gains. If you meet the requirement that the property was your principal residence for 2 out of the prior 5 years then you will have no US capital gains to pay. Assuming you lived in the UK property for the two years immediately preceding your move here, then that would mean completing the sale within 3 years of your arrival in the US to avoid capital gains on the sale. Otherwise you will pay capital gains on any gains above $250K/$500K if filing single/married. Unfortunately US capital gains will be payable on the difference between the purchase price and the sale price, not the value on the date you moved here. Therefore best to get the sale completed within the timeframe that avoids US capital gains.

I would check the rules on UK capital gains tax. As a non resident I think you have to pay UK capital gains on all gains from 2015 onwards, with relief for any year in which you lived in the property for at least 90 days. You would get a tax credit in the US for any tax paid in the UK, so at least you won’t be paying capital gains twice on the same income. EDIT: this link might help https://www.gov.uk/tax-live-abroad-sell-uk-home

If you have a mortgage your bigger concern may be the tax on the foreign currency gain when you redeem the mortgage upon sale. In short you make a foreign currency gain if the value of the mortgage in USD is less at redemption than it was when originated. That happens when the £ has a higher exchange rate at mortgage origination than it does when redeemed. The exchanges rates back in 2009 were very volatile but even at their lowest they were considerable higher than they are now, so there would be a foreign currency gain which would be taxed as ordinary income. Every 1 cent difference on each £100,000 of mortgage will generate $1,000 of foreign currency gain so those taxes can add up fast. There is no way to avoid this tax.

In terms of being tax efficient while continuing to rent the property. Make sure you are reporting all income and claiming all of the allowed US expenses, and depreciation on your US tax return. Depreciation is very important because they will claw back all allowed depreciation upon the sale whether you took it or not, and if you did not take it annually then you will lose out financially because you cannot take it retrospectively. And, of course you have to report the income and expenses to the UK as well and pay tax there if any due, although you will get credit in the US for any UK tax paid.

Pulaski

Do you mean "one percent ..."?

Glasgow Girl

No, I meant what was originally stated. A one cent drop in the exchange rate on every £100,000 of the mortgage creates a foreign currency gain of $1,000, which is the same thing as taking one percent of the mortgage in £ and then preceding that number with a $ to calculate the foreign currency gain for every one cent drop in the exchange rate. I find it is easier to understand and explain the concept using the originally stated method, but either works. It is essentially the same thing.

The calculation itself is very easy. The foreign currency gain in $ is (the exchange rate on the date of origination - the exchange rate on the date of redemption) multiplied by the amount of mortgage redeemed in £.

Here is an example. A £100,000 mortgage originated when the exchange rate is $1.50 is valued at $150,000. If redeemed when the exchange rate is $1.49 then it is valued at $149,000. The foreign currency gain is $1,000 because the amount required to redeem the mortgage is less in $ terms (even though the mortgage was always in £!).

Pulaski

Thank you. Yes, I am more used to it being explained and calculated in the latter way, also not used to exchange rates being described a movement in cents, but we're all good.

Sq25394

Thank you for your insight.

It was our main residence so I’ve got until Aug 2024 to off load the house which I plan to do. It’s worth a fair bit but I believe the x-rate should improve, somewhat, in that time.

The outstanding mortgage is £50k and I plan to pay it off next summer. Our mortgage lender allowed 2 year grace period of being non-UK resident, renting our home without forcing me off my 5 year fixed rate. But after his period is a double whammy of having to move to a new package, mandatory buy to let deal (poorer rates) and possibly forced to default on a 5 yr fixed due to circumstances change. The last point is subjective.

Sq25394

what date do you mean be originated? The date I took the original mortgage, latest 5 year (current) mortgage or date I emigrated?

Glasgow Girl

Not the date you emigrated. The date your current mortgage account number was originated, almost certainly whenever you last signed papers to authorize the loan. If you refinanced the entire original loan that would be the date that you refinanced, but if it was just an adjustment to an interest rate without changing the account number then it would be the original loan.

If your mortgage is only £50,000 you could try to avoid this, or at least reduce it, by overpaying the principal each month or making additional principal payments.. A foreign currency transaction has what they call a de minimus amount of $200, which means that so long as the foreign currency gain on that transaction is less than $200 then there is no tax to pay. You would need to do the math with the exchange rates you are dealing with to see how much principal you could pay off in each transaction and keep under the $200 limit.

I agree that the exchange rate should only improve, but I never saw it going as low as it is now, so who knows for sure.

EDIT: You definitely want to pay it off if they are going to force you onto a new mortgage next summer. The reason being that you will be redeeming the current mortgage and therefore subject to the foreign currency gain at that time, and when you take out a new mortgage you will be subject to it again when you redeem that one. Although hopefully the exchange rates will improve soon perhaps making for a zero or negative gain on the new mortgage. Unfortunately, there is no benefit to a negative gain. A crystal ball would be helpful for sure.

christmasoompa

If you've been renting the house since you left the UK 15 months ago, then isn't some CGT already due there? https://www.gov.uk/tax-sell-home/let-out-part-of-home

Sq25394

interesting and thanks.

so I bought the house in 2009, let out in November last year, we moved to US in Aug 21. We will sell the house before August 24 to keep in line with Glasgowgirl 2 out of 5 year rule.

So, when we sell. 13 years we lived in it and let it for 2 including the 9 month relief rule. So 13% of the net gain will be subject to CGT.

question is this will offset any CGT I would have to pay under US IRS laws?

Glasgow Girl

You will receive a credit with the IRS for any tax paid to the UK, the net result being that you pay the IRS only the difference (if the IRS tax is higher). But if you sell while meeting the primary residence 2 out of 5 year rule, or the profit is less than $250K/$500K singe/married, then it is a moot point

Sq25394

I just need to meet that 2/5 rule and ensure I exit the house before Aug 24 to get the joint tax relief.

Geobots

Do you know if the depreciation figure is the same each year on us tax returns if you use the straight line method or do you have to recalculate each year using that years exchange rate?

Glasgow Girl

I can’t say with 100% certainty, but I am pretty sure that you use the exchange rate in effect when you first place the property into service as a rental and then use the same amount every year. That is the only thing that makes sense, anything else would result in too much or too little depreciation and would most definitely, not be be straight line!

Cook_County

The rental activity will currently be reported in the US on Schedule E, Form 8858 and a foreign branch category Form 1116. There is some debate about whether or not a foreign rental property is a QBU (Qualified Business Unit) although the prudent view is that it probably is; in which case you'd be figuring everything each year (including depreciation and mortgage gain) in the foreign currency and converting the result each year into US dollars using the weighted average for the US tax year. This could have the effect of eliminating foreign currency mortgage gains but reporting sightly different depreciation amounts each year. This discussion in a professional tax forum will make it abundantly clear there is no certainty: TaxProTalk.com • View topic - Foreign Rental amd Form 8858