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Tax on property

Tax on property

Old Jun 12th 2020, 9:10 pm
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Default Tax on property

Hi all,

I am in the process of obtaining my greencard and I have a few questions about US Tax. Basically I'm trying to workout whether it's worth selling or keeping the property I own to rent.

1. Is there capital gains payable on the sale of a UK property? If so, what is the % taken from the sale?

2. How much tax is payable for rent from a UK property?

Thanks,

Shaun
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Old Jun 12th 2020, 10:55 pm
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Default Re: Tax on property

These are not simple questions, and I'll tell you up-front, if you are intending to make your home long term in the US then selling before you become liable for US taxes is almost certainly the best answer, from the perspective of both taxes and practicality.

You will be liable for income taxes in both the UK and US on rental income, but the UK taxes are almost certainly going to be greater as the UK tax regime is not as landlord friendly as the US. As you should get a credit in the US for Federal income tax rental income tax paid in the UK you are, IMO unlikely to owe income tax in the US on the rentai income. There is however the matter of state and possibly city income tax, which may be charged on your UK rental income without recognizing a credit for tax paid in the UK.

The capital gains tax situation is much more complex as you are presumably already accruing liability for UK CGT, and when you become a permanent resident you will start to accrue taxable capital gains liability in the US, but US CGT will accrure from the date of purchase, not from when you became liable for taxs in the US, However the US will also calculate a notional gain on the repayment of the mortage if you were sell when liable for US taxes. The notional gain is typically caused by a fall in the value of pound sterling compared to US dollars, and after the pouind collapsed in 2016 this created a potentially quite large taxable gain for anyone paying taxes in the US who had a home in the UK financed with a mortgage taken out before June 2016.

This is an example I posted previously

The capital gain on the payoff of your mortgage is created because it took fewer dollars to pay off the balance than you received when you took out the mortgage.

Say you borrowed £120,000 when the exch rate was $2/£1, so from the IRS's perspective you borrowed $240,000. Several years later, after you have paid off £20,000 and moved to the US you sell the house and pay off the mortgage. The exch rate is now $1/$1, so you pay £100,000, but at today's rate, from the IRS's perspective, it only cost you $100,000 to pay off the mortgage, not the $200,000 (paid down part of what) you received. You have a taxable gain of $100,000!


In short, it's the difference between the current dollar value of the mortgage payoff amount and the dollar value of the mortgage payoff amount at the exchange rate on the day you originally took out the mortgage (or most recent refinance if you have refi'ed at some point).

Last edited by Pulaski; Jun 12th 2020 at 11:47 pm.
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Old Jun 12th 2020, 11:16 pm
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Default Re: Tax on property

Originally Posted by Pulaski View Post
As you should get a credit in the US for rental income tax paid in the UK you are, IMO unlikely to owe income tax in the US on the rentai income.


I think you missed the word “federal” while the UK credit may cover any federal liability the OP may also be subject to state and or a city tax, so despite a surplus credit they may end up paying more out of pocket in the US, all depends what state they will be a tax resident in.
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Old Jun 13th 2020, 2:11 am
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Default Re: Tax on property

Originally Posted by Pulaski View Post
However the US will also calculate a notional gain on the repayment of the mortage if you were sell when liable for US taxes. The notional gain is typically caused by a fall in the value of pound sterling compared to US dollars, and after the pouind collapsed in 2016 this created a potentially quite large taxable gain for anyone paying taxes in the US who had a home in the UK financed with a mortgage taken out before June 2016.

This is an example I posted previously



It should be pointed out that this notional income is not part of capital gains. Credit forgiveness is straight up income. I am not so sure that the situation you posit would create income for US purposes.
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Old Jun 13th 2020, 2:06 pm
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Default Re: Tax on property

Originally Posted by S Folinsky View Post

It should be pointed out that this notional income is not part of capital gains. Credit forgiveness is straight up income. I am not so sure that the situation you posit would create income for US purposes.
(i) it is a capital gain on a foreign currency position - from the IRS's perspective you took a short position in (sold) expensive foreign currency when you took out your mortgage, and realized a gain when bought back cheap foreign currency to close out the position. While the "sense" is inverted becuase it relates to a loan not an asset, from a capital gain perspective it is no different from an investment in bullion, real estate, or securities - you accrued a capital gain from a financial transaction.

There is no "credit forgiveness" angle when a mortgage is redeemed, the lender is made whole - receives full repayment.

(ii) the gain on the loan has been taxed under the described circumstances, as a capital gain, on at least one member of BE that I know of/ remember.

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Old Jun 14th 2020, 1:47 pm
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Default Re: Tax on property

Originally Posted by Pulaski View Post
(i) it is a capital gain on a foreign currency position - from the IRS's perspective you took a short position in (sold) expensive foreign currency when you took out your mortgage, and realized a gain when bought back cheap foreign currency to close out the position. While the "sense" is inverted becuase it relates to a loan not an asset, from a capital gain perspective it is no different from an investment in bullion, real estate, or securities - you accrued a capital gain from a financial transaction.

There is no "credit forgiveness" angle when a mortgage is redeemed, the lender is made whole - receives full repayment.

(ii) the gain on the loan has been taxed under the described circumstances, as a capital gain, on at least one member of BE that I know of/ remember.
I've seen various discussions on how exactly that gain is reported and not seen a definitive answer (cap gains are reported on Sched D and reporting foreign currency "assets" being bought and sold is not all obvious). A look on the TurboTax Community forum on this subject and the best answer seems to be to report it as regular "other income". Much better tax treatment if it could be classified as a long term capital gain.

You can follow the discussion below, where the member asks why it can't be reported as a long term capital gain .

https://ttlc.intuit.com/community/ta.../168970#M22612

June 1, 2019 8:04 AMThe foreign exchange rate gain is reported on Schedule 1, line 8 and then Schedule 1, line 9 (which includes all your additional income) is transferred to line 7a of your 1040.

The exchange gain is considered ordinary income and not capital gain income.

When your return is open:
  1. Click on Federal taxes at the top of the screen
  2. Click on Wages & Income
  3. Scroll all the way down to Less Common Income
  4. Scroll down to Miscellaneous Income, 1099-A, 1099-C
  5. Click on start
  6. At the bottom of the list, click on Other reportable income
  7. Click Yes for other taxable income
  8. Enter description such as Foreign Exchange Rate Gain and the amount
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Old Jun 14th 2020, 6:09 pm
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Default Re: Tax on property

Originally Posted by durham_lad View Post
I've seen various discussions on how exactly that gain is reported and not seen a definitive answer (cap gains are reported on Sched D and reporting foreign currency "assets" being bought and sold is not all obvious). A look on the TurboTax Community forum on this subject and the best answer seems to be to report it as regular "other income". ...
That's probably correct (other income), as it is taxable gain, but perhaps not a "capital" gain, and I avoided the issue myself by selling immediately, though currency movements weren't an issue back then either,

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Old Jun 14th 2020, 7:21 pm
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Default Re: Tax on property

Originally Posted by Pulaski View Post
That's probably correct (other income), as it is taxable gain, but perhaps not a "capital" gain, and I avoided the issue myself by selling immediately, though currency movements were the issue back then either,
We did the same, tried to keep things simple.
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Old Jul 18th 2020, 12:35 pm
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Default Re: Tax on property

Personally, I am not 100% convinced about the applicability of taxable gains due to FX changes when the UK mortgage is refinanced, which other posters have highlighted above.
I am a US resident currently looking at refinancing my UK mortgage. After reading some of the advice on this forum, I decided to do my due diligence. I checked with my retained US tax advisor, who is straight as an arrow, if I would have any taxable gains on the refinancing.
Her response: 'You were in the right track within your description in that a refinance isn’t a sale. I’ve never seen any issues with FX gains at all actually.'
The US tax system is famously complicated, even for experienced practitioners, and there is room for different interpretations sometimes.
If you find yourself in a situation where you need to educate/twist the arm of your tax advisor to convince her to "let" you pay a large amount of tax, then that says a lot to me. Particularly when it is calculated on a random and arcane basis which bears no resemblance to actual economic gains, and which most people struggle to wrap their heads around. And in any case, would any notice be drawn? Sometimes it is better to let sleeping dogs lie.
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Old Jul 18th 2020, 5:31 pm
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Default Re: Tax on property

Originally Posted by jt89104 View Post
Personally, I am not 100% convinced about the applicability of taxable gains due to FX changes when the UK mortgage is refinanced, which other posters have highlighted above.
I am a US resident currently looking at refinancing my UK mortgage. After reading some of the advice on this forum, I decided to do my due diligence. I checked with my retained US tax advisor, who is straight as an arrow, if I would have any taxable gains on the refinancing.
Her response: 'You were in the right track within your description in that a refinance isn’t a sale. I’ve never seen any issues with FX gains at all actually.'
The US tax system is famously complicated, even for experienced practitioners, and there is room for different interpretations sometimes.
If you find yourself in a situation where you need to educate/twist the arm of your tax advisor to convince her to "let" you pay a large amount of tax, then that says a lot to me. Particularly when it is calculated on a random and arcane basis which bears no resemblance to actual economic gains, and which most people struggle to wrap their heads around. And in any case, would any notice be drawn? Sometimes it is better to let sleeping dogs lie.
Most US tax advisors will have few if any resident aliens/ dual citizens.

Most resident aiiens/ dual citizens will have little or no taxable income or investments overseas, or any non-US investments they do have wiil be very "ordinary", such as bank interest or equity dividends.

Among the few resident aliens/ dual citizens who do own investment property overseas, most are likely to hold it long term, so refis and mortgage redemptions will be fairly rare.

Among the mortgage redemptions and refis, there will be, looking at years worth of currency fluctions, as as many FX gains as losses, with many in the "middle area" where there isn't much of a gain or a loss.

Given the above ladder of nested probabilities, I am very comfortable suggesting that the overwhelming majority of US tax professionals will never have seen a "tax on FX gain on a mortgage issue", and probably wouldn't even know to look for one.

I am not sure what a tax advisor would do if you told them that you had "a long term GBP short position that you closed out at a profit"? That is certainly a taxable event, but IMO likely much rarer than the foreign mortgage redeemed at a gain scenario described above.

In short, by not considering the issue of an FX gain on a non-USD mortgage you are taking a punt that your tax return won't be audited,
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Old Jul 20th 2020, 6:59 pm
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Default Re: Tax on property

Thanks Pulaski for your reply. I agree with you that it is possible that most US tax professionals could have a long and successful career without ever having to consider this issue. I did have time to think about this matter further:

1. Let's assume for argument's sake that a taxable FX gain is indeed generated upon a refi. In that case, by extension of the same logic, there should be a taxable FX gain (or loss) generated upon each monthly mortgage payment that is made prior to the refi. A monthly remortgage repayment can be broken down into principal and interest components. Each monthly principal component is being repaid at a different FX rate (in USD terms) from the FX rate at which the money was borrowed when the house was originally purchased. So one could make an argument that there is a "long term GBP short position that is being closed out" on each and every monthly repayment. It is just a lot smaller in size. If a gain on refi needs to be declared, why not a gain on each monthly payment? Admittedly this would be extremely complicated and burdensome to calculate - but the same logic should stand (and tax professionals typically embrace things that are complicated and burdensome ).

2. You mentioned that by not considering this matter, there is a risk if the tax return is audited. Is there a section on the tax return which requires a declaration of refinancings of non-USD loans? If so, I am not aware, but I might have missed it.

3. Have any of the readers of this thread actually themselves declared an FX gain and paid a chunk of US taxes as a result of refinancing their mortgage? (Note I am not referring to a sale of the property, but only to a refinancing of the mortgage).

4. Conversely, if GBP strengthens against USD, then there should be an FX loss if the mortgage is refinanced. In practice, this is less likely in recent years due to Brexit and GBP weakening so much. But it might be the case for certain mortgages that people took out many years ago, or for mortgages which were only outstanding for a relatively short time before being refinanced. Have any of the readers of this thread declared a taxable loss upon refinancing their British mortgage, and been successfully able to offset that loss against their other US income and therefore reduce their overall US tax bill? Tax analysis like this often works in both directions - if there is a gain in one direction then there could be a loss in the other direction.
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Old Jul 20th 2020, 7:11 pm
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Default Re: Tax on property

Originally Posted by jt89104 View Post
Thanks Pulaski for your reply. I agree with you that it is possible that most US tax professionals could have a long and successful career without ever having to consider this issue. I did have time to think about this matter further:

1. Let's assume for argument's sake that a taxable FX gain is indeed generated upon a refi. In that case, by extension of the same logic, there should be a taxable FX gain (or loss) generated upon each monthly mortgage payment that is made prior to the refi. A monthly remortgage repayment can be broken down into principal and interest components. Each monthly principal component is being repaid at a different FX rate (in USD terms) from the FX rate at which the money was borrowed when the house was originally purchased. So one could make an argument that there is a "long term GBP short position that is being closed out" on each and every monthly repayment. It is just a lot smaller in size. If a gain on refi needs to be declared, why not a gain on each monthly payment? Admittedly this would be extremely complicated and burdensome to calculate - but the same logic should stand (and tax professionals typically embrace things that are complicated and burdensome ).

2. You mentioned that by not considering this matter, there is a risk if the tax return is audited. Is there a section on the tax return which requires a declaration of refinancings of non-USD loans? If so, I am not aware, but I might have missed it.

3. Have any of the readers of this thread actually themselves declared an FX gain and paid a chunk of US taxes as a result of refinancing their mortgage? (Note I am not referring to a sale of the property, but only to a refinancing of the mortgage).

4. Conversely, if GBP strengthens against USD, then there should be an FX loss if the mortgage is refinanced. In practice, this is less likely in recent years due to Brexit and GBP weakening so much. But it might be the case for certain mortgages that people took out many years ago, or for mortgages which were only outstanding for a relatively short time before being refinanced. Have any of the readers of this thread declared a taxable loss upon refinancing their British mortgage, and been successfully able to offset that loss against their other US income and therefore reduce their overall US tax bill? Tax analysis like this often works in both directions - if there is a gain in one direction then there could be a loss in the other direction.
1. No, I can cut through your lengthy question/ explanation here. That is specifically excluded. IIRC the gain has to be more than $500 per repayment transaction to be chargeable, i.e. ongoing loan repayments are effectively excluded, and the very fact that there is a specified de minimis amount points to the fact that there is a taxable event when the gain is larger.

2. Even if it doesn't show up directly in your tax return, It would show up on your bank statements and/or other documents which might be demanded during the course of an audit. For example would likely show up as a difference in the amount of interest deducted per year (mortgage interest on investment properties being deductible for US income tax purposes).

3. I don't know of any, but I wouldn't "out" them if I did. .... I might point to a public post if they had made one, and if I was aware of one, and if could find it again.

4. Any loss has very limited scope for offset. Again IIRC it would only be offsetable against profits made in the same activity, which presumably would mean currency speculation, but might be defined even more narrowly, such as "gains on long term foreign currency loans".

Last edited by Pulaski; Jul 20th 2020 at 7:17 pm.
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