toalorama

I moved to Texas in Oct 2011 with my wife and child (H1B/ H4 *2).
We decided to rent out our property in the UK.
We are now selling the property and hope to buy a house in the US.
I would like to understand the US tax implications of selling the house.
I have a reasonable amount of equity.
I have been told that I may have to pay tax on the equity as the US taxes on world wide income.
Not sure if that is thought of as income tax or capital gains.
The equity was accrued over many years before I came to the US (over many properties) so I would feel very hard done to if I was taxed on the whole amount.
If any tax lawyers, could give me any advice that would be great. Or any Austin Texas lawyer referrals that specialize in this area, that would also be great.
Thanks.

Michael

If the home was your primary residence (you lived in it for 2 of the past 5 years), there is a $500,000 exclusion on capital gains if married filing jointly or $250,000 if married filing separately or filing single. Therefore you should sell it prior to 3 years after you moved out to get the exclusion.

http://www.bankrate.com/finance/real...-owners-1.aspx

http://www.irs.gov/publications/p523/ar02.html

Gains are calculated based on selling price - expenses - the purchase price + expenses. Equity is not a basis for calculating gains. Long term capital gains are taxed at a maximum of 15%. If you have been renting it out for the past 2 1/2 years, you should have been depreciating the value of the house and that has to be recaptured and taxes will need to be paid on the recaptured depreciation at a 25% rate.

Pulaski

So long as you sell before the third anniversary of moving out of the house (assuming you had lived in it for the preceding 730-731 days), there is no US CGT impact so long as the gain is not more than $500,000 if filing jointly, or 250,000 if filing separately.

LTCGs are taxed at 20% if your income exceeds $457,600.

toalorama

Thank you.
Same answer from two people 1 min apart.
Thanks Michael for the extra info on how capital gains is calculated / not equity.

Michael

Only the gains that exceeds the $457,600 of total income.

Pulaski

Agreed, but for those on high income or with large gains, there is a higher rate than 15%, which was your assertion.

theOAP

Don't forget about NIIT. It may or may not apply.

nun

What about foreign exchange gain. Is this applicable if the house was purchased as an NRA and then sold as a resident alien?

Bob

When does/did the change to CGT in the UK come in? Would that affect this situation?

Pulaski

I believe that's not until next year, at the earliest, but in any case the principle private residence exemption, which covers the OP's circumstances, relieves him from ANY UK CGT liability.

Bob

But part of the change was the shorten the time not being used as a private residence by quite a bit wasn't it?

Pulaski

Ah, yes, I think you're right.

HartleyHare

See thread below. My post #10.

http://britishexpats.com/forum/showthread.php?t=824180

JAJ

In principle, if you sell you may make a capital gain between the original cost of the property (translated into USD) and the sale price (in USD). If you made capital improvements these can be added to the original cost. The net profit is a capital gain, or there may be a capital loss. As long as you have held the asset for 12 months or more, any gain would normally be at long term rates although the new investment income tax may also apply.

In addition, as others have said you can normally exclude the capital gain if you lived in the property for 2 years out of the last 5. However, there's also the issue of depreciation deductions being recaptured as ordinary income (at a special tax rate, up to 25%, usually), assuming you've rented out the property. There may also be other issues to consider. So you probably would need a competent tax practitioner CPA to review your case and calculate the numbers.

There may be a U.K. capital gains tax liability as well, since the property was not your principal private residence the whole time, and some of the exclusions related to rented out property have been reduced recently. Check with a U.K. tax professional. Any U.K. capital gains tax may be held in abeyance depending on whether you remain outside the U.K. for 5+ years.

Which leads to the most important question - you're on the H1 visa which is not a good visa for long term settlement in the United States. Have you a clear and present intention + strategy to get a green card, or would you be fine with being effectively forced to sell your U.S. property quickly if you had to leave?

Michael

I couldn't find it in the IRS document but this article seems to indicate that recapture of depreciation is taxed at a maximum of 25%.

The part of the gain that is related to depreciation, however, will be taxed at a maximum 25% rate.

http://taxes.about.com/od/capitalgains/qt/recapture.htm