Ramki

I am hoping some of the experts on this forum can shed light on the query below (I have gone through many useful threads {& learnt a lot} however could not clearly clarify the query, so apologies if this has been already covered)

I understand the capital gains and fx benefits (related to section 988) are treated separately in case one sells their prime UK residence after moving to the US, however it is not clear how the potential FX benefits on pending mortgage are calculated.

For example,

Price of prime residential property at time of purchase (2010) = 100,000 £
Initial mortgage (2010) = 50,000 £
Current mortgage (2016) = 35,000 £
Pending mortgage at the time the house is sold (~ 2019) = 30,000 £

Assuming I am classified as US tax payer from the 2017 US tax year, will the FX calculation on mortgage repayment be on 35,000 £ (mortgage pending at the time of move to US?) or on the entire 50,000? My understanding is that it will be based on 35,000 * exchange rate in 2010 - 35,000 * exchange rate at the time of sale - if this is a positive number, then it will be treated as capital gains in the tax return of 2019 (year when property is sold in the example)?

Can someone clarify if the fx calculation is not applicable if there is no pending mortgage at the time of moving to the US? (i.e. if the pending mortgage is cleared before relocation)

Thanks

Pulaski

The FX gain/ loss is calculated on the balance at the time the loan is repaid, despite the fact that much of that might have accrued in the period before you moved to the US. There is no attempt to apportion the gain between the period before and after you became tax-resident in the US.

Ramki

Thanks for the quick reply, what I infer is that in case of unfavourable exchange rate scenario (as seems to be trend currently for £ vs $) its better to repay as much of the mortgage as possible before the eventual sale.

Please do let me know if I have it wrong (which I am quite capable of).

Pulaski

That would be "before you become US tax resident" ..... ANY premature pay-off/pay-down can attract an FX gain, not just the final one. IIRC a gain on any one payment of $200 or less is ignored, but if you start making additional monthly payments, there should be an FX calculation for each one. ..... Whether the IRS would notice is a different question and one that I am not willing to speculate on.

carlrush

OP - This assumes there's no US tax payer involved in the property before you move.

If your visa is through marriage then your spouse will have tax liabilities on their half of the property, irrespective of whether they are named on the mortgage/deeds or not.

That will start from at least the date of your marriage, if not before.

Ramki

Thanks carlrush, no US tax payer involved however we could have a scenario where I move to US first (becoming a US tax payer) followed later by my spouse (becoming US tax payer after the sale).

In such a case is the tax liability on the property ownership or mortgage deed? i.e If the property is owned by the spouse but the mortgage is in both names, will it still be liable for tax on potential fx gain?

Thanks

carlrush

The liability is based on ownership and not what deeds, mortgage agreements etc might have said when they were signed.

In my case we were both married and my wife was a US citizen when we bought the house so situation was clear cut (even though mortgage was in my name only as she had limited credit rating at the time).

I'm not sure how it would work for you as, for the vast majority of your time of ownership you were not required to pay tax in the US.

Hopefully someone on here will have the answer.