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Tax Question : Is mortgage interest on a UK home loan deductible?

Tax Question : Is mortgage interest on a UK home loan deductible?

Old Nov 28th 2015, 6:15 am
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Default Tax Question : Is mortgage interest on a UK home loan deductible?

Hi All,

New to US and all the tax complication

Has anybody made use of mortgage interested deduction on their UK property ?

Thanks,
Alex
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Old Nov 28th 2015, 6:19 am
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

i think we did. mind you our UK mortgage was an interest only mortgage too!
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Old Nov 28th 2015, 2:16 pm
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by AndyB_uk View Post
Hi All,

New to US and all the tax complication

Has anybody made use of mortgage interested deduction on their UK property?
For the purposes of your US tax return, yes, mortgage interest is deductible, and will continue to be so regardless of what tax decisions are made in the UK.

You also also get a US tax deduction for depreciation of the historic cost (what you actually paid) of the building (not the land) - for non-US property it is 1/40th of the cost of the building. Per the US tax code you are required to take this deduction, and you will be taxed (capital gains tax on the depreciated value) on the eventual sale of the property regardless of whether you took the depreciation deduction each year.

Obviously in the UK valuations are not usually available for the land independent of the building, but ascribing 20% to the land value for a house is a good rule of thumb. The land value will increase as you move closer to a city center, especially in London, and will decrease for a flat because you are dividing the value of the land between more units. As you move closer to a city both effects will be happening and will offset each other ..... the land value of a flat in a tower on Park Lane might still be 20% because of the extraordinary land value despite the value being split between 200 units.

In the US tax return you can deduct not only mortgage interest and depreciation, but also insurance, management fees, marketing costs (advertising for a new tenant), repairs and maintenance, property taxes (if any), and pretty much anything you spend on the property that you would not otherwise have spent had you not owned the property, e.g. the cost of a tax accountant to prepare your business tax return.

The effect of the above is that it is perfectly possible to have NO taxable income on a rental property!

Last edited by Pulaski; Nov 28th 2015 at 2:28 pm.
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Old Nov 28th 2015, 2:24 pm
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by Pulaski View Post
You also also get a US tax deduction for depreciation of the cost of the building (not the land) for non-US property it is 1/40th of the cost of the building. Per the US tax code you are required to take this deduction, and you will be taxed on the eventual sale of the property regardless of whether you took the depreciation deduction. Obviously in the UK valuations are not usually available for the land independent of the building, but ascribing 20% to the land value for a house is a good rule of thumb, but the land value will increase as you move closer to a city center, especially in London, and will decrease for a flat because you are dividing the value of the land between more units ...... as you move closer to a city both effects will be happening and will offset each other ..... the land value of a flat in a tower on Park Lane might still be 20% because of the extraordinary land value despite the value being split between 200 units.
Does this depreciation deduction apply to your primary home in the UK (where you live), or only on properties you rent out and/or second homes you use for vacation?

http://www.investopedia.com/articles...ate-abroad.asp

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Old Nov 28th 2015, 2:26 pm
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by durham_lad View Post
Does this depreciation deduction apply to your primary home in the UK (where you live), or only on properties you rent out and/or second homes you use for vacation?
Depreciation is a business expense, so only applies to properties rented out.
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Old Nov 28th 2015, 2:28 pm
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by Pulaski View Post
Depreciation is a business expense, so only applies to properties rented out.
Thanks, I just wanted to clarify that as I read the OP as asking about the house he is or will be living in.
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Old Nov 28th 2015, 2:35 pm
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by durham_lad View Post
Thanks, I just wanted to clarify that as I read the OP as asking about the house he is or will be living in.
That's an interesting point, because I had assumed he was renting it out, or intending to. ...... He doesn't actually say either way!

You can deduct mortgage interest on two properties, but I believe the amount of borrowings on the "second home" is capped at the interest on $100,000 of borrowings.

Last edited by Pulaski; Nov 28th 2015 at 2:42 pm.
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Old Nov 28th 2015, 4:30 pm
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by Pulaski View Post
That's an interesting point, because I had assumed he was renting it out, or intending to. ...... He doesn't actually say either way!

You can deduct mortgage interest on two properties, but I believe the amount of borrowings on the "second home" is capped at the interest on $100,000 of borrowings.
Maybe he will be back to clarify, because you are probably correct.
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Old Nov 29th 2015, 9:42 pm
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by durham_lad View Post
Maybe he will be back to clarify, because you are probably correct.
This use to be my main house in UK until I moved to USA 3 weeks ago ..currently renting in USA.

The UK house is empty but planning to rent is as from February 2016.

Thanks
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Old Nov 29th 2015, 10:05 pm
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by AndyB_uk View Post
This use to be my main house in UK until I moved to USA 3 weeks ago ..currently renting in USA.

The UK house is empty but planning to rent is as from February 2016.

Thanks
This is what happened when we first moved over as well. We rented it out for 6 years before selling it.

As mentioned above you need to keep a profit and loss account, depreciating the property as described above. As part of our package working for the company we were required to use the accountancy firm provided to us so they collected all our info each year and handled the taxes. One good bit of advice that they provided was that repair work could be counted as expenses but not capital improvements, which we had a number of. Instead of repairing the old oil fired furnace we replaced it with a brand new gas furnace, and other things like that. We intended to return and wanted to upgrade the house when the opportunity arose. However we intended up staying in the USA so when we sold the house we had to face capital gains in the USA and at that point the money spent on capital improvements increased the cost basis of the house which helped with lowering the capital gain.
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Old Nov 29th 2015, 10:44 pm
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by durham_lad View Post
This is what happened when we first moved over as well. We rented it out for 6 years before selling it.

As mentioned above you need to keep a profit and loss account, depreciating the property as described above. As part of our package working for the company we were required to use the accountancy firm provided to us so they collected all our info each year and handled the taxes. One good bit of advice that they provided was that repair work could be counted as expenses but not capital improvements, which we had a number of. Instead of repairing the old oil fired furnace we replaced it with a brand new gas furnace, and other things like that. We intended to return and wanted to upgrade the house when the opportunity arose. However we intended up staying in the USA so when we sold the house we had to face capital gains in the USA and at that point the money spent on capital improvements increased the cost basis of the house which helped with lowering the capital gain.
Great info ! Many thanks :-)
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Old Nov 30th 2015, 12:24 am
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by durham_lad View Post
..... As mentioned above you need to keep a profit and loss account, depreciating the property as described above. ...... One good bit of advice that they provided was that repair work could be counted as expenses but not capital improvements, which we had a number of. ....
Capital improvements are then depreciated too, so the depreciation calculation can get a bit messy.
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Old Nov 30th 2015, 12:41 am
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by Pulaski View Post
Capital improvements are then depreciated too, so the depreciation calculation can get a bit messy.
I'm certain that you are correct and it was certainly nice having the company's accounting firm do all the calculations and tax return.
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Old Nov 30th 2015, 1:08 am
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by durham_lad View Post
I'm certain that you are correct and it was certainly nice having the company's accounting firm do all the calculations and tax return.
Domestic appliances are also depreciated, over five years. ..... Tax accountants are very useful.
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Old Nov 30th 2015, 1:14 am
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Default Re: Tax Question : Is mortgage interest on a UK home loan deductible?

Originally Posted by Pulaski View Post
Domestic appliances are also depreciated, over five years. ..... Tax accountants are very useful.
I also recall that since we rented the house furnished he had us estimate the value of the furniture at the start of the rental process and depreciated that also.
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