Itwillrain

We are moving to the US from London on L1B. Exciting times. We are planning on moving to the US before selling the house. We plan to put the house for sale and move to the US (the sale and completion can happen after we are in the US).

Tax is making me worried.

I've put some numbers (only for illustration purposes) and would like to understand the tax implication.

Numbers are Only for illustration purposes
Purchase Price of the house (let's say in 2015) = GBP 600 thousand

Cost of building work = GBP 50 thousand

Sale Price = GBP 1 million

Gain on Sale = GBP 1 million – GBP 650 thousand = GBP 350 thousand (EQ USD 475 thousand)

This is the only house property we (my wife and I) own in the UK.

This was never rented out.

Question

US tax - If we move to the US before completion of the sale, then USD 475 thousand is considered as income in the US. But if we file joint tax return then $500K is exempt. So no tax to be paid in the US, even if the sale of UK property completes after our landing in the US.

UK tax - If I move to the US before completion of the sale, the gain on sale of the house is not taxed in the UK because it was our residential house (never rented out).

Is my understanding of UK and US tax correct?

Thanks for your help.
​​​​​​​

Glasgow Girl

Your understanding of the US tax situation is correct, so long as the house was your principle residence for two of the past 5 years. I can’t talk to the UK tax situation, You also need to beware of foreign currency gains if you are in the US when your mortgage is paid off by the sale. In summary, take the value of your mortgage when it is paid off, calculate its value on USD at current exchange rates, subtract from the same mortgage amount converted into USD using the exchange rates in place when you took it out. If the value is positive then you have to pay tax on that as ordinary income. If the amount is negative then there is no tax to pay. Their thinking is that if changes in the exchange rates mean that you are paying back less than you originated (in USD) then you made a profit and you have to pay tax on that.

robtuck

UK - I believe you are correct. Might be worth investigating that further though: https://www.gov.uk/tax-live-abroad-sell-uk-home

Itwillrain

​​​​​​Wow. I had not thought about the mortgage point. The pound has depreciated against the USD between 2015 (date when mortgage was taken) and 2022. This would imply there is an income due to repayment of mortgage. Let's say that income due to repayment of mortgage is usd 60k. Would this 60k also be part of usd 500k exemption or that 500usd exemption is not applicable for such mortgage fx related income?

Thanks.

Glasgow Girl

I am afraid that the foreign currency gain on the mortgage would not be part of the $500K exemption. The whole amount is subject to federal tax as ordinary income at your highest marginal rate, plus state tax. Also watch out for this amount pushing you over the limit for Obamacare tax and other nasty little gotcha’s if you have any Capital Gains. Your first year will likely be a short tax year, since it runs Jan to Dec so your annual income won’t be as high as it would otherwise be, and you may have lower than normal taxes, so you may get a little break there.

Itwillrain

Omg.. That's trouble. .

To get 500k exemption I don't have to reinvest the proceeds in the new house. Correct?

And the mortgage fx gain. Is it calculated on the mortgage remaining unpaid before the same of the house or mortgage at inception... If it is the o/s mortgage balance, then I could reduce the balance by making some early repayment, if that provides some relief under the rules.

Thanks a lot.

newadventure

I'm no expert and this won't be possible if you are already in the sales process, but if you remortgaged before becoming a US tax resident, the starting point would be the date of your new mortgage and therefore FX gains much less

Itwillrain

So the best way would be to repay the mortgage (through other savings) before stepping foot in the US to avoid this FX income.
Big thanks

Glasgow Girl

Yes

S Folinsky

Out of idle curiosity, will payoff by a refinance prior to taking residence in the US reset the clock so to speak on the purported currency gains?

Glasgow Girl

So long as the refinance terminates the original loan and a new loan (with a new account number) is originated before becoming subject to US taxes. An adjustment to the interest rate on the same loan won’t do it. The opposite is also true, if you refinance while a US resident you will be subject to foreign currency gains at that point because you just repaid the original loan.