natenaif

Hi,

I've been in the USA working for 2.5 years and have just sold our only home in the UK. We are immediately pumping the funds into a US property and I was wondering if:

a) I was liable to capital gains tax in the UK (note: we had two tenants for a year each).
b) I am liable to capital gains tax in the US.

If I am liable in either case then what sort of % am I looking at?

Also, we added 30 GBP of upgrades just to sell the house - would that be discounted from any gain?

Finally, if we are liable then can the gain be distributed between my wife and my own tax return?

Many thanks,

Nate...

natenaif

Note: we have owned the UK property since 2003.

ian-mstm

What is your status in the US?

Ian

Steve_

Are you resident in the US for tax purposes? Assuming you are:

CGT is calculated on the adjusted cost base, i.e. the gain minus the costs involved in achieving the gain, such as realtor fees. The tax is applied to that amount.

I'm no expert on UK CGT I admit, but normally how this works (on real estate) is that you pay CGT in both jurisdictions, and claim a foreign tax credit in the jurisdiction where you reside for the CGT paid in the other country. As the US has pretty low CGT what that means is you pay the effective rate in the foreign country usually, once you've claimed the tax credit (because the US isn't going to give you full credit for a foreign tax). Or slightly more, depends on the amount of the credit.

However bear in mind as it was your principal residence until 2.5 years ago, you're only liable to CGT over that period of time, which is probably trivial in this economy and it sounds as though your costs exceed the gain, so there is no tax.

In fact if anything it would be a capital loss, so if you have a capital gain from any other source you can offset it. Capital losses can be carried forward indefinitely. Line 14 on Schedule D.

Why aren't you filing jointly?

natenaif

We have green cards so our resident with regard to US tax. We have only been back in the UK for two weeks since we moved here 2.5 years ago.

Even with the house upgrade costs we still did make a gain as opposed to a captial loss.

srefre

But did you make a gain, compared to the houses value 2.5 years ago, taking into account the costs?

natenaif

2.5 years ago the house was worth 35k more than what we sold for this month.

We gained ~80k on the sale overall. That would be reduced to ~50k if we can offset the 30k we pumped into home improvements.

natenaif

Would the gain not be classified as:

The sale price (this month) - the purchase price (8 years ago)
Which would lead to a capital gain (this is how I thought CGT worked).

You are suggesting it is:

The sale price (this month) - the sale value (when we left 2.5 years ago).

That would lead to a loss but is it correct?

Thanks all

Steve_

So you've incurred a capital loss then. Hard to say whether the "improvements" could be counted in the loss as well, but technically you're out of pocket £65,000 on that property since it ceased to be your principal residence.

Main thing you need is some evidence of what the house was worth 2.5 years ago to demonstrate there was in fact a loss.

Bear in mind rental income is subject to income taxes.

srefre

You know what, I wasn't really thinking with my first reply.

I was so distracted with calculating the capital gains, that I forgot the home was sold within 3 years of it being your main residence, plus you were unable to live there due to your work, so you won't be liable for capital gains at all.

Source: http://www.hmrc.gov.uk/cgt/property/sell-own-home.htm#2

srefre

Off topic, but the 3 year rule is a commonly used 'trick', by people such a politicians etc... with multiple homes, they constantly change their main residence and avoid any CGT.

Cape Blue

In the UK.

Cape Blue

Via the Principle Private Residence allowance.

natenaif

Oh that is very interesting. It has been less than three years for sure.

Is the three year rule applicable if you work for USA employer and not a result of a uk employer sending you abroad? In my case I was forced to look at and move to USA as there were no jobs in my uk region.

If I am clear in the uk then how about the USA?

Thanks again for the info

Nate

srefre

Yes, I kind of took that bit for granted as referring to HMRC and UK tax laws.

It won't make any difference whether you employer is from the US or the UK. As long as it was your primary residence prior to the 3 years before you sold, you're in the clear in the UK.

Unfortunately, I don't know anything about US tax law, so hopefully someone else can come along and provide the answer for that side of things.

My hunch is that there would be a similar exemption for primary residence, although the period in which you would have had to have last lived in it and for how long are likely to be different. So this is perhaps the first thing you want to investigate.