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Tax on UK rental income

Tax on UK rental income

Old Jun 5th 2012, 3:47 pm
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Default Tax on UK rental income

Hi all....this site/forum looks tremendously helpful. My wife and I are relocating to US from UK for work (we are British citizens).

I'm working my way through the US tax maze and had a question. We have a property we are letting out in UK; will we have to disclose this to US IRS in a tax returns and will we be taxed on on UK rental income (even though we will be taxed on it in the UK)? The rental income in UK over 12 months could be ~£90k. Appreciate your help!
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Old Jun 5th 2012, 4:06 pm
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Default Re: Tax on UK rental income

We rent out our UK property and declare all rental income in the US on our annual tax returns. The US requires all worldwide income to be delared. As for the UK, we declared the rental income for the first few years but then were notified that unless our UK derived income changed dramatically we did not need to file any more UK tax returns. By the time we took off all our allowed deductions, our UK income was below the pesonal allowance threshold. It looks as if yours will be considerably highter so you will probably need to declare it and pay tax in the UK, but with the dual taxation agreements I don't think you will be taxed again in the US although you must declare it. I'm sure someone more knowledgeable than me will be along to clarify that.
Good luck with your move.
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Old Jun 5th 2012, 4:13 pm
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Default Re: Tax on UK rental income

Yes, you will be taxed on it in the US. You will be able to offset foreign tax paid. If I were you, I'd spend a little of that 90k on a decent tax guy to make sure you're properly looked after.
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Old Jun 5th 2012, 4:18 pm
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Default Re: Tax on UK rental income

You can also claim depreciation in the US on your UK rental which can help alot. I would also recommend getting a tax guy to do this for you.
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Old Jun 5th 2012, 4:27 pm
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Default Re: Tax on UK rental income

Thanks this is very helpful. To be clear, it is 2 apartment I would be letting out; total rental income of £90k, against which there is £40k of interest payments, £10k of service charges, a bit of maintenance (depreciation) I can charge.
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Old Jun 5th 2012, 4:37 pm
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Default Re: Tax on UK rental income

I wouldn't know as I don't have mortgages on any of my UK stuff, but seem to remember someone reading a post from someone saying that they were having problems claiming interest on multiple overseas units....
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Old Jun 5th 2012, 4:39 pm
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Default Re: Tax on UK rental income

Originally Posted by DP1234 View Post
Thanks this is very helpful. To be clear, it is 2 apartment I would be letting out; total rental income of £90k, against which there is £40k of interest payments, £10k of service charges, a bit of maintenance (depreciation) I can charge.
Maintenance is not the same as depreciation.

http://www.irs.gov/publications/p527/index.html
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Old Jun 5th 2012, 6:29 pm
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Default Re: Tax on UK rental income

Originally Posted by DP1234 View Post
Thanks this is very helpful. To be clear, it is 2 apartment I would be letting out; total rental income of £90k, against which there is £40k of interest payments, £10k of service charges, a bit of maintenance (depreciation) I can charge.
In this case you should be able to offset the interest payments, service charges, maintenance and insurance. Re the above post about the ability to claim the interest, a good tax guy here in the US should be able to clear that up.

Maintenance and depreciation are not the same. The IRS assumes that a building has a finite lifespan and you write it down over the assumed lifetime. This can make a whole lot of a difference.

I would also consult with a UK tax professional to see if you actually have to pay taxes on the UK property if you are not a resident. Admittedly I'm not making any money on my UK house so I don't have to pay taxes anyway, but I have to fill in a tax return in the UK and in the US. You can probably apply any taxes paid in the UK as a foreign tax credit here in the US, but there is a cap on that IIRC.

I'd agree with all of the other posters, you need a competent CPA here in the US who is familiar with the US foreign tax credits etc.
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Old Jun 5th 2012, 7:18 pm
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Default Re: Tax on UK rental income

I completed form NRL1 - "Non-resident landlord scheme – Application to receive
UK rental income without deduction of UK tax". This allows my agent to pay the whole of the rent to me (minus his fees) without deducting the UK tax.

I was told by my tax advisor that this would make my tax returns easier. I've not been here for a full tax year yet, so can't comment on whether this is true or not. What I have been doing though is setting aside some of the rent money in anticipation of a bill from the IRS (and/or HMRC) after the next round of tax returns....
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Old Jun 5th 2012, 7:40 pm
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Default Re: Tax on UK rental income

Are you sure that you can't deduct the interest? I know I can, but I've only got a house that used to be my primary residence.
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Old Jun 5th 2012, 7:42 pm
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Default Re: Tax on UK rental income

Originally Posted by nun View Post
You will have to declare any income so it can be taxed in the US. You can't deduct mortgage interest on a rental property for US tax purposes, but you can depreciate the value of the property and deduct expenses you incur.
Yes you can. From the IRS publication

Interest expense. You can deduct mortgage interest you pay on your rental property. When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Chapter 4 of Publication 535 explains mortgage interest in detail.
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Old Jun 5th 2012, 8:00 pm
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Default Re: Tax on UK rental income

Originally Posted by N1cky View Post
Yes you can. From the IRS publication

Interest expense. You can deduct mortgage interest you pay on your rental property. When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Chapter 4 of Publication 535 explains mortgage interest in detail.
Yes sorry I have a brain malfunction.........I've been looking at capital gains tax on rentals recently and had that on my mind.

Mortgage interest on a rental property is an expense that can be deducted from your taxable income. You can also depreciate the value of the property, but not the land. if you sell you will have to pay capital gains on the entire amount of any gain.
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Old Jun 7th 2012, 3:37 am
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Default Re: Tax on UK rental income

My husband has a house in the UK. We declare the rental income but deduct the mortgage interest and depreciation. We deduct repairs and any maintenance work as well. He also completed the NRL1 as well as complete UK tax returns the first two years he moved here.

Pete Newton is our accountant who is a

www.britishexpatstax.com

Last edited by penguinbar; Jun 7th 2012 at 3:37 am. Reason: meant to say Pete is an expat as well!
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Old Jun 7th 2012, 4:14 am
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Default Re: Tax on UK rental income

Originally Posted by DP1234 View Post
Hi all....this site/forum looks tremendously helpful. My wife and I are relocating to US from UK for work (we are British citizens).

I'm working my way through the US tax maze and had a question. We have a property we are letting out in UK; will we have to disclose this to US IRS in a tax returns and will we be taxed on on UK rental income (even though we will be taxed on it in the UK)? The rental income in UK over 12 months could be ~£90k. Appreciate your help!
UK tax - you will be taxed and will need to submit a self-assessment return. Tax will be gross income minus tax free allowance (circa 7K in UK or double if for two of you), mortgage interest, insurance, agents fees, gas safety etc costs and 10% wear & tear allowance (basically no different than if you have been letting one already).

As an overseas landlord, you will need to complete for NRL1 - this does NOT give you any tax-free status, it just permits the rent to be paid to you in a normal fashion as if you were a UK landlord - otherwise the tenant or the letting agent has to deduct 20% tax at source and pass direct to HMRC. (you also need to complete a P85 - that is not letting-specific, everyone leaving does)

US tax - a different tax year (calendar as opposed to April/April which is a bit of a pain). You basically go through the same calculation, except you can depreciate the property in the US (and you need to think about the value of the property to declare as the base for depreciation) and you deduct any tax already paid in the UK. You then (effectively) pay US tax on your lettings profit at your US marginal income tax rate.

If I were you I would do the UK self-assessment myself (includes any bank interest, dividends and all that) and I would get someone else to do my US return. Don't forget you effectively have to calculate your UK tax twice - once for the UK on an April 5th - April 4th year and then for the US on a Jan 1st to Dec 31st year.
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Old Mar 5th 2013, 10:08 pm
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Default Re: Tax on UK rental income

Hi All,

I have a related question to this.
My wife and I are moving to the US in the next 3 months. We have a UK rental property that is solely on my wife's name. It has no mortgage on it. rental income is 16,000 GBP.

From reading some of the previous posts, it seems like we may only be able to claim one set of taxable allowances of 8k is that correct? and then we may have to pay a fair bit of tax in the US as we have no interest expense to offset the income.

Would it be better to a) have a small mortgage on this property? and b) have both myself and my wife on the title deeds?

Many thanks,

Doug
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