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Taxes for UK home owner

Taxes for UK home owner

Old Jan 6th 2014, 1:13 pm
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Default Taxes for UK home owner

Hello,

I am going to be living in California shortly on a non-immigrant visa. I have arranged to let my house while I live in the United States.

I have received advice that I could be taxed quite heavily should I refinance my UK home while I'm a US resident. From the sounds of it is it dependent on the exchange rate at the time of taking out my existing mortgage on the property vs the exchange rate when I refinance in the future.

In my circumstance I have a fixed rate mortgage that reverts to a very uncompetitive rate in 2015. It has always been my intention to remortgage at this point for obvious reasons.

I will not be selling the house nor will I remortgage to take any equity out of the property.

I'm aware that my rental income is taxable in the US but I'm surprised to learn that remortgaging could involve tax liability.

I have not found any information to support this advice and I find it difficult to believe that there would be taxes to pay when no income is received. Does this ring any bells for anyone and do you have any concrete information on the subject?

Many thanks!
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Old Jan 6th 2014, 1:22 pm
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Default Re: Taxes for UK home owner

Refinancing a rental property in the UK while you are overseas may present significant challenges, based on the recent (2013) experience of others reported here on BE. Therefore you might consider refinancing now, while you're still living in the house and in the UK.
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Old Jan 6th 2014, 1:34 pm
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Default Re: Taxes for UK home owner

Thank you for the reply. Unfortunately I have not got enough time to refinance before I go.
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Old Jan 6th 2014, 2:05 pm
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Default Re: Taxes for UK home owner

Originally Posted by 1r0ns View Post
I have received advice that I could be taxed quite heavily should I refinance my UK home while I'm a US resident. From the sounds of it is it dependent on the exchange rate at the time of taking out my existing mortgage on the property vs the exchange rate when I refinance in the future.
I suspect this is what you're referring to:

http://www.expatwomen.com/expat-wome...h-the-risk.php
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Old Jan 6th 2014, 4:14 pm
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Default Re: Taxes for UK home owner

Damn...yet another thing to track when we go home...
This will apply when we go back and if we get a mortgage?
Am I missing something though? You're generally not paying it off in a lump sum but over time...so does the IRS only consider the final payment date to evaluate potential profit?
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Old Jan 6th 2014, 4:27 pm
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Default Re: Taxes for UK home owner

Originally Posted by theOAP View Post
I suspect this is what you're referring to:

http://www.expatwomen.com/expat-wome...h-the-risk.php
If you have any gain due to foreign exchange you have to pay tax on it. That goes for mortgages, sales of houses, capital gains on stocks etc.
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Old Jan 6th 2014, 8:35 pm
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Default Re: Taxes for UK home owner

Originally Posted by hotscot View Post
Damn...yet another thing to track when we go home...
This will apply when we go back and if we get a mortgage?
Am I missing something though? You're generally not paying it off in a lump sum but over time...so does the IRS only consider the final payment date to evaluate potential profit?
My understanding is that this only happens if you pay off the loan while you are a US resident. Paying off the loan is a loose term, as when you refinance you are basically paying off the loan with another loan.

It makes me feel sick to be at the mercy of currency exchange rates. I'm trapped
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Old Jan 8th 2014, 12:19 am
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Default Re: Taxes for UK home owner

Originally Posted by 1r0ns View Post
My understanding is that this only happens if you pay off the loan while you are a US resident. Paying off the loan is a loose term, as when you refinance you are basically paying off the loan with another loan.
Also note that running a business in another country may allow you to use that country's currency as the functional currency ("qualified business unit"). Your tax return, your call, etc. There have not been many reports of IRS audits with this issue as primary focus.
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Old Jan 8th 2014, 1:32 am
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Default Re: Taxes for UK home owner

Originally Posted by JAJ View Post
Also note that running a business in another country may allow you to use that country's currency as the functional currency ("qualified business unit"). Your tax return, your call, etc. There have not been many reports of IRS audits with this issue as primary focus.
But would a single rental property qualify as a business?
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Old Jan 8th 2014, 1:46 am
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Default Re: Taxes for UK home owner

Originally Posted by nun View Post
But would a single rental property qualify as a business?
Yes. See these guidance notes http://www.hmrc.gov.uk/worksheets/sa105-notes.pdf.

If you own UK land or property which produces rent.... We treat you as operating a property rental... Whether you have one or several properties.

(Sorry, can't cut and paste).

But as long as you are registered as a non resident landlord, non resident for uk tax purposes and use the deductibles for insurance and so on this will minimise any tax liability uk wise.
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Old Jan 8th 2014, 2:01 am
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Default Re: Taxes for UK home owner

Originally Posted by thekettlewitch View Post
Yes. See these guidance notes http://www.hmrc.gov.uk/worksheets/sa105-notes.pdf.

If you own UK land or property which produces rent.... We treat you as operating a property rental... Whether you have one or several properties.

(Sorry, can't cut and paste).

But as long as you are registered as a non resident landlord, non resident for uk tax purposes and use the deductibles for insurance and so on this will minimise any tax liability uk wise.
What about the IRS? If the rental is personal property would renting it be a "qualified business unit" as presumably the payments are being made to you in the US.

Last edited by nun; Jan 8th 2014 at 2:07 am.
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Old Jan 8th 2014, 10:03 am
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Default Re: Taxes for UK home owner

Originally Posted by nun View Post
What about the IRS? If the rental is personal property would renting it be a "qualified business unit" as presumably the payments are being made to you in the US.
My rental income will be paid in pounds into a UK account, the same account that pays the mortgage each month. However, I will be living and working in the US and paid in USD.
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Old Jan 8th 2014, 10:05 am
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Default Re: Taxes for UK home owner

Originally Posted by JAJ View Post
Also note that running a business in another country may allow you to use that country's currency as the functional currency ("qualified business unit"). Your tax return, your call, etc. There have not been many reports of IRS audits with this issue as primary focus.
Interesting idea, although since my employer will pay me in dollars it might not be feasible to make my functional currency anything else.
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Old Jan 8th 2014, 10:25 am
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Default Re: Taxes for UK home owner

Originally Posted by nun View Post
If you have any gain due to foreign exchange you have to pay tax on it. That goes for mortgages, sales of houses, capital gains on stocks etc.
This does make sense but it seems odd that I would be perceived to have made a gain when my UK home is financed in pounds, paid for in pounds, the rental is in pounds, the account is in the UK and I have no intention of selling or extracting any equity from the property. All I need to do is refinance it.

The IRS will still apparently view this as a gain if the dollar is stronger when I refinance than it was the last time I refinanced.

Let's say I borrowed £100,000 when the exchange rate was 1.7 ($170,000). If I refinance (let's say it's interest only to keep it simple) when the rate is 1.5 then it would only cost me $150,000 dollars to pay off the debt and I have been perceived to have gained $20,000 which would be taxed at my personal marginal income rate.

Considering I will not be refinancing in dollars, there is no actual gain I can make so it feels like daylight robbery.
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Old Jan 8th 2014, 12:06 pm
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Default Re: Taxes for UK home owner

OwS
Originally Posted by 1r0ns View Post
This does make sense but it seems odd that I would be perceived to have made a gain when my UK home is financed in pounds, paid for in pounds, the rental is in pounds, the account is in the UK and I have no intention of selling or extracting any equity from the property. All I need to do is refinance it.

The IRS will still apparently view this as a gain if the dollar is stronger when I refinance than it was the last time I refinanced.

Let's say I borrowed £100,000 when the exchange rate was 1.7 ($170,000). If I refinance (let's say it's interest only to keep it simple) when the rate is 1.5 then it would only cost me $150,000 dollars to pay off the debt and I have been perceived to have gained $20,000 which would be taxed at my personal marginal income rate.

Considering I will not be refinancing in dollars, there is no actual gain I can make so it feels like daylight robbery.
I suspect there is a little more to this than is being discussed here, and that a consultation with an experienced tax accountant would be recommended. Not least because in the example above, you would have "gained" $20,000, but the underlying asset would have created an offsetting loss. To keep the numbers simple, assuming you had 100% finance, your $170k house would now be $150,000k. I am not sure how the IRS would see this, but am fairly certain there is much more to this than has been discussed here.

So far as the "functional currency" issue goes, I think the possibility exists to create a business corporation and have it hold the house and book all income and expenses through it, as a "holding company", and off-shore from the US. It would have its own tax computation, and as owner you would only see the net flow of money between it and your personal account. That might be a bit excessive for a single house, but I mention it only to point out that there are additional complicating factors that a tax accountant would know.

Last edited by Pulaski; Jan 8th 2014 at 12:17 pm.
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