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Tax liability on UK property sale: GC holder Vs US Citizen

Tax liability on UK property sale: GC holder Vs US Citizen

Old Apr 17th 2011, 2:27 am
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James Chesterton
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Default Tax liability on UK property sale: GC holder Vs US Citizen

Hi,

I am a Green Card holder and thinking ahead would like to work out if US Citizenship may be beneficial to me or not. I own a house in the UK and at some point I will probably sell it, at that point am I going to have a US tax liability on the profit if I am a Citizen by then or am I going to have less of a liability if I am still a Green Card holder?

For example when my UK house is sold, the mortgage gets paid off and then if I am left with say £300k - do I have to pay US tax on that? ie: do I have to declare a huge amount of income on April 15th of the following year because of the money from the house sale?

I understand that GC holders are treated like US Citizens from a tax point of view and I read on the IRS website that US citizens have to declare the gains from any non-US property that is sold. This tells me that I could have a US tax liability on the sale of my UK house? Am I wrong about that? Is there some kind of exemption I could fall under?

In the USC pros and cons Wiki on this site it says: 'From 2006 to 2011, the first $2M is protected from estate taxes. Beyond 2011, if congress does not extend the repeal, then only the first $650K is free of taxes. However, for non-citizens, the rules are different and any estate over $650K is taxable.'

This is the first I have heard of this, maybe I am looking at the wrong thing . . . . .

If anyone can advise me on whether there is a difference if you are a CG holder or Citizen in terms of being liable to pay income tax on the lump sum gain amount you receive when you sell a UK property and if some of this is indeed tax free then I would really appreciate it! Many Thanks!

Last edited by megalaser; Apr 17th 2011 at 2:29 am.
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Old Apr 17th 2011, 3:12 am
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

I am not the right person to give you the details on this (but I'm interested in the answer since I'm going through the same thing). I think that there have been a number of posts on this topic in the past though.

But just to clarify, the "estate tax" sounds like it should be relevant to selling a house but I think that it is referring to the passing of property and investments to a spouse or dependent after death. So hopefully is not relevant in your case.
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Old Apr 17th 2011, 3:17 am
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

No I am not interested in spouses, inheritance ect, only the US federal income tax liability for GC holders and citizens on the profit from the sale of UK property.

In short I am trying to work out how expensive it could be to live in the US - if it's going to cost me a fortune I may end up leaving!
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Old Apr 17th 2011, 3:24 am
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

Originally Posted by megalaser View Post
I own a house in the UK and at some point I will probably sell it, at that point am I going to have a US tax liability on the profit if I am a Citizen by then or am I going to have less of a liability if I am still a Green Card holder?
If you sell the house at a profit, you will have the same capital gains tax liability whether you are a PR or a USC.

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Old Apr 17th 2011, 3:27 am
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

OK so a GC holder is treated the same as a Citizen but would the all the profit from the sale of a UK property be treated as regular income during that tax year or does it fall under something else taxed at a different rate?
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Old Apr 17th 2011, 4:34 am
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

Capital gains is capital gains, plenty of threads on the selling of a home that is or isn't your primary residence.

As a LRP, you've still got to file and responsible for taxes to the IRS for 10 years after giving up the card so you've got no real disadvantage to not getting US citizenship.
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Old Apr 17th 2011, 1:00 pm
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

Originally Posted by megalaser View Post
... would the all the profit from the sale of a UK property be treated as regular income during that tax year or does it fall under something else taxed at a different rate?
Income is income... selling a house isn't income... it's a capital gain! Which is why I said "capital gains tax". Feel free to peruse www.irs.gov to locate the specific liabilities.

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Old Apr 17th 2011, 1:04 pm
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

Wikipedia says: 'In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income'
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Old Apr 17th 2011, 4:42 pm
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

Originally Posted by megalaser View Post
Wikipedia says: 'In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income'
I think you're having difficulty grasping the difference between "tax on earnings" and "tax on capital gains". While both are income, they're also not the same thing. I'm probably not explaining this well... but I'm also not a tax attorney or CPA.

If you rely on the IRS rather than Wikipedia, you'll probably get a much better understanding.

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Old Apr 17th 2011, 5:07 pm
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

First if you lived in the house for 2 of the past 5 years, it is considered your primary residence and if sold during that time, you get a $250,000 exclusion if filing single ($500,000 if married filing jointly) from capital gains. Since you didn't say how long you've had the house, I mentioned the above.

Secondly equity doesn't make any difference when calculating capital gains but you use the cost basis (cost of house plus buying fees) and subtract that from the selling price minus selling expenses and improvements to determine the capital gains. Long term capital gains (assets held for more than 1 year) are currently taxed at the federal level at a maximum of 15%.

Finally the estate tax exclusion (currently $5 million) you were referring is the exclusion on transfer of assets upon death.

Also if you pay UK taxes on the sale, you can use those taxes paid as a credit against US taxes owed.

Last edited by Michael; Apr 17th 2011 at 5:12 pm.
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Old Apr 18th 2011, 7:09 pm
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

Also, be aware, that if you have an exchange rate gain, that will be taxed at your current tax rate - i.e if you took a mortgage out in 2008 for say 140,000 pounds - this gets converted to $ at the rate on that day. On the day you sell, the amount you pay back gets converted into $ at the rate onthat day. If there has been a gain through the exchange rate changing you will have to pay tax on that. If you make a loss, you cannot claim the loss. I only found this out because we sold a property last year, and although we took out a 140k mortgage, and actually repaid 146k ( GBP) back - the difference in exchange rates showed we had made a currency gain of $16,000 - and we had to pay tax on this! Even though the mortgage was taken out in punds before we moved over here, and paid back in punds - so no money actually went into our USD account. Sucks! This is in addition to your capital gains
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Old Apr 18th 2011, 7:23 pm
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

Thanks but is that:

A) The rate on the day you originally bought the house (ie: the first day of the original mortgage)

or:

B) The rate on the day that the current mortgage was taken out on.

The reason I ask is that the house (I am sure many people do this) has had several mortgage changes over the years,

The current mortgage is only 2 years old but the house was bought (ie: I took ownership and the first mortgage was taken out) 15 years ago.

Surely the day I took ownership of the house is the relevant date for the rate to be based on?

Thanks!
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Old Apr 18th 2011, 8:38 pm
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

Originally Posted by megalaser View Post
Thanks but is that:

A) The rate on the day you originally bought the house (ie: the first day of the original mortgage)

or:

B) The rate on the day that the current mortgage was taken out on.

The reason I ask is that the house (I am sure many people do this) has had several mortgage changes over the years,

The current mortgage is only 2 years old but the house was bought (ie: I took ownership and the first mortgage was taken out) 15 years ago.

Surely the day I took ownership of the house is the relevant date for the rate to be based on?

Thanks!
It is the date you purchased the house since you are determining the capital gains on the house.
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Old Apr 19th 2011, 1:45 am
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

Michael - you are talking about Capital Gains. This is regarding Exchange Rate gains - a seperate issue. We are having this discussion with PWC ( who do our taxes) at the moment. I have just asked the same question as we bought our house 8 years ago, but regularly chnage lenders to take advantage of cheaper rates. They said they need to know every time we have changed our mortgage so they can work out the exchange rate gain or loss each time eek! If only we were made aware of this before we moved over we would have sold our house before the move. I am not trying to scare anyone - but want to make you aware of the potential tax liability. we were told that the gain would be taxed at your current tax rate - as it is not capital gains. If you need to clarify this you should get a tax advisor - but we were extremely shocked to say the least. It is beginning to feel like the IRS has us by the short and curlies!!
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Old Apr 19th 2011, 1:57 am
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Default Re: Tax liability on UK property sale: GC holder Vs US Citizen

The trouble is of course is that it's very hard to sell a house in the UK right now, I planned to sell it before I emigrated but there were no buyers! At this point I plan to wait many years before trying to sell it, then it will hopefully increase in value more and yes of course I will have to pay the IRS more at that point. Life is not perfect . . . .
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