Selling a UK property but getting US tax demands
 

Hi,

I really need some tax advice please.

I've been in the US for 2 1/2 years on an L1B visa.

In January 2013, I sold a UK property that I'd owned for 6 years, for a £3000 loss. I checked the UK tax implications and, there are none.

However, the calculations on my US tax return are that I owe $9000! What they've done is the exchange rate to USD on the date I purchased my UK flat, and the same again on the date I sold it, and have come up with me having made $44,000 on the sale of my home.

I don't know what to do to not have to pay the $9000 in tax. Can anyone give me some advice on these crazy calculations and demands please? Any help would be very much appreciated!

Re: Selling a UK property but getting US tax demands
 

Was the flat you home until you left the UK? Was it your home at any time?

Re: Selling a UK property but getting US tax demands
 

Yes it was - I lived in it until I moved to the US, and then left it unoccupied for a year before I sold it and shipped over all the furniture.

I found IRC section 121 which, to me, reads that I shouldn't have to pay any tax in the US on the sale:

http://www.irs.gov/publications/p523/ar02.html#en_US_2013_publink1000200792

However, I'm being told that I'm being taxed due to "foreign currency exchange rate gain". I'm flabberghasted and would love to find out if this is really a valid tax.

Hoping you can help me!

Re: Selling a UK property but getting US tax demands
 

What about the actual calculation?

Did you in fact make a loss in GBP but a profit in $$ because of the exchange rate?

Re: Selling a UK property but getting US tax demands
 

I lived in my flat before I moved to the US, and then left it unoccupied for a year before selling it in January 2013.

Reading IRC Section 121, I didn't think I should be impact as I made a 3000 GBP loss:

Publication 523 (2013), Selling Your Home

However, I'm being told that, because exchange rates make it look like I made a $44,000 gain, I have to pay $9000 in tax under the "foreign currency exchange rate gain". But there was no actual gain, and all transactions took place in GBP.

Really hoping you can help me to not have to pay this!

Re: Selling a UK property but getting US tax demands
 

Yes, it is still a capital gain.

Re: Selling a UK property but getting US tax demands
 

My understanding is that from the perspective of the IRS you borrowed $x but were able to discharge the loan by paying the lesser amount of $y, and $x-$y was a benefit to you of $44k.

I do not know exactly how the calculation is performed, nor what reliefs might be available. At very least you should get a second professional opinion on both the decision and the calculation.

Re: Selling a UK property but getting US tax demands
 

Did you at any time rent out the home after leaving? If so, take a look at the laws regarding QBU (Qualified Business Unit). A QBO can allow a deferral (or even potential avoidance) of U.S. tax on a currency gain.
I suggest you consult a tax consultant who specializes in these matters, which rules our an HR Block or other main street tax preparer.

Re: Selling a UK property but getting US tax demands
 

Yes, although whether or not a loan was involved is irrelevant - it is simply that the OP bought an asset for $X and later sold it for $X + $44k.

The OP definitely needs to consult a competent tax advisor on this issue to figure out how to minimize whatever the tax consequences of this transaction might be - it isn't clear from this thread exactly who it is that is currently advising him.

Re: Selling a UK property but getting US tax demands
 

That's not how I read the scenario. I thought the issue was the gain on the loan? ..... He borrowed an amount equivalent to $x, but due to exchange rate movements he discharged it in full for a lesser dollar amount. In which case whether or not an asset was involved is irrelevant.

Either way though it's a complex matter that needs the attention of a suitably experienced professional, and probably a supporting second opinion.

Re: Selling a UK property but getting US tax demands
 

Yes - depending on the facts there may turn out to be a simple answer or it may turn into one of those cases where one has to shop it around several advisors until you find one that can come up with a good faith basis for reporting and filing in such a way as to minimize the tax consequences.

Anyway, if this was the OP's principal residence - which we don't know because we don't know if he lived there for at least 2 out of the last 5 years - can't he just exclude that $44k gain - or have the rules changed - don't know ... :(

Re: Selling a UK property but getting US tax demands
 

Also something to keep in mind if you don't already. Maximise any retirement accounts for the tax deduction.

Re: Selling a UK property but getting US tax demands
 

Agree it could be the gain on the loan, but also if the OP was a self-preparer, and/or used TurboTax and erroneously entered the same exchange rate for both the purchase and the sale (or a whiz at a corner low budget tax service did this), then it could also be the issue. Looking at the time line, owned for 6 years and sold in 2013, the exchange rates would support either.

I don't know (but doubt) an IRS computer will automatically enter an allowed deduction ($250,000 or $500,000) since a loss was claimed, so even this could cancel the IRS debt if the OP were allowed the deduction.

Whatever, the OP needs to find the exact error, and then seek assistance to sort it out with the IRS.

Re: Selling a UK property but getting US tax demands
 

Thank you everyone for your views on my situation!

I didn't rent out my property at all - I just left it unoccupied with all my furniture in it for my first year in the US (and lived in it during my visits back to the UK during that year).

It's Ernst and Young who are preparing my tax returns and telling me I will need to pay this. Based upon errors in previous years though, I'm not very confident in what they tell me.

Re: Selling a UK property but getting US tax demands
 

Was there a mortgage? Did E & Y claim an equivalent foreign exchange loss on the mortgage?

Have EY used the correct spot rates, which are not interbank rates, but interbank plus 4%? Have EY possibly divided when they should have multiplied - or vice versa? Have you checked the maths?

What have EY declared on the 8938 form?

Do you have any excess foreign tax credits in the passive basket that could offset the tax?