Helen1234

Hi



My husband and I own two small flats in the UK. I just moved to US and my husband stays in the UK. We own two small flats directly. I fill in the tax separatedly and my husband doesnt have any tax relationship in the US. I have a few questions.



1. Because my husband is in the UK and I will visit him frequently. We do not rent them out temporialry. I assume I do not need to report anything about these two flats to IRS, including Fbar, 8938. Is it correct?



2. When my husband moves to US, I guess we may rent them out. If we plan to rent them out, I assume we need to include it to 1040. I think I do not need to report it to Fbar and 8938 as well. Is it correct?



3. May I ask how to calculate the profit? I assume (rent income - service charge fees from the building - ground rent from the landlord - renting agency fees - mortage interests)/2 for each of us. Does my deductable items correct or anything more? And I assume I can also claim back the tax paid to UK government?



Thanks.

spouse of scouse

Other costs you may be able to offset against rental income are these three mandatory items for landlords:
Gas Safety Check (needs to be done annually in England, check for other jurisdictions)
Electrical Installation Condition Report - every 5 years in England, check as above if your properties are located elsewhere in the UK.
Energy Performance Certificate - valid for 10 years. Depending on the building/s your flats are located in, your flats may be covered by an EPC for the entire building. If not, you'll need to organise your own.
All of the above must by law be provided to the tenant prior to them moving in.

There is also a landlord licence required if your flat/s are located in a selective licencing area.
There are additional licences required if the tenancy of your flat/s meet the definition of Houses in Multiple Occupation

Other costs you may be able to offset against rental income are maintenance/replacement costs for items such as cookers and other fixtures and fittings of the flats.
Also landlord insurance.

robin1234

Correct. No income from the flats, so no reporting for tax purposes. No FBAR or 8938, because those reports are concerned with financial assets - not real property. (We’ve owned a flat in England since 2015, so that’s what we’ve done or not done.)

Glasgow Girl

Yes to 1 and 2. Property is not required to be reported on an FBAR or Form 8938 by anyone. Rental income will go on the 1040.

On 3, you can deduct just about any expense related to the rental so long as you have a receipt that clearly pertains to the rental and was paid by you. So everything mentioned by yourself and others but also insurance premiums, utilities, any tax paid, cleaning fees between tenants, all repairs, etc.

In the US you also must depreciate the value of the property minus the land (the land is usually estimated at about 20% of the market value). Depreciation is complicated but for overseas residential houses they make you take 1/30 of the house value every year as a depreciation expense. That reduces your tax bill in each current year, however they will make you pay that back when you sell. So somewhat a complete waste of time unless you are in different tax brackets when you rent versus selling in which case you can end up a little better, or a little worse off. In any case you must take the depreciation, if you don’t they will will assume you did at so when you sell and you will end up with a tax bill on the depreciation whether you took it or not, so you might as well get the benefit.

Split the rent and expenses 50/50. If you have the lease put in your husbands name only and all rent is paid to him into an account independent of you I think it would not count as income while he remains in the UK. Renting an overseas property is almost identical to renting a domestic property, the only real difference being that domestic property is depreciated over 27.5 years versus 30 years for overseas property.

Make a fake account on turbo tax and play around with dummy values in the rental section, it does a good job of explaining the ins and outs of a rental and answers most questions. You can access it for free, only have to pay when you go to file and then you can set up a real account and start fresh so that your dummy values do not mess up your real account.

Pulaski

For flats the land value can vary a bit - with an older block the land may have higher redevelopment value, especially if it is nearer the city center or a main road or junction. Conversely, if there are many flats, the value of the land is divided between more flats. .... But 20% is going to be in the ballpark in most cases.
Helen1234 The one thing I would add to GG's comprehensive advice is that by the time you have deducted mortgage interest, depreciation, and insurance, not to mention the other things, it is likely that you taxable income will be very low, and may even be a loss, and that may continue for several years, or longer if you don't increase the rent. Do not be concerned about that, it is perfectly normal and does not mean that you have done something wrong in your calculations, nor are you going to get investigated by the IRS for that reason. In fact depending on your overall income, you may even be able to deduct some of your "loss" on the rental from your income (I am not 100% sure about how that works for an overseas rental ).

Helen1234

Many thanks

Helen1234

Got it. That is a very useful advice. When you say deducted mortgage interest, depreciation, and insurance, not to mention the other things, I assume I can still deduct other things mentioned by them, right? But before doing that, the profit may be very low

Helen1234

Many thanks Just one more question. If the lease has the name of both of us but the income goes into his own account. Can we do it half/half to save tax?

Pulaski

Oh, yes, deduct everything you are allowed to, I only meant to point out that those three deductions alone could turn your gross rental income into a tax loss. In the worst case scenario you get to carry losses forward indefinitely and can set them against future profits from renting that specific property - from the date of acquisition/ first lease it could quite possibly be ten years, or more before you have taxable profits.
In the US marital income is assumed to be 50:50 unless there is a specific reason to split it differently (e.g. income from employment is attributed to the earner if filing separate tax returns), but is in most cases ("married filing jointly") all rolled into the same tax computation anyway. My wife and I are partners in an LLC we own (with no other owners/ partners) - there is no need for us to have a partnership agreement, it is just assumed (by our bank, the IRS, etc.) that we each have a 50:50 interest, and the separate tax return for our LLC is prepared and filed, but is then merged into our personal, joint tax return.
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Agreed!
​​​​​​ I believe this to be the case.

Glasgow Girl

Yes you could split it 50% but if all the income goes into a bank account independent of you and is not shared, you probably do not need to declare it at all which would simplify things for you in the US. However, I would calculate the difference between your total tax bill with your husband husband paying UK tax on 100% of the income and you paying zero US tax, and again with a 50/50 split, and perhaps even a 0/100 split with you taking all of the income.and see which scenario works out the best for you. With the better tax breaks in the US it is possible that you reduce your overall tax bill by taking the entire income yourself and paying US tax instead of UK tax. The numbers will speak for themselves.

Edit: you might have to pay UK tax on the rental anyway just because it is located in the UK, I can’t remember for sure.

spouse of scouse

You're welcome Helen. Something I've just noticed, you mentioned interest on your mortgage. If you're on a residential mortgage, you'll need your mortgage provider's consent to let the properties. This is required whether or not you're living in the UK. There's usually a cost attached, with most providers either charging a fee for a 'Consent to Let', or increasing your interest percentage rate. Some may insist that you switch to a buy to let mortgage.

S Folinsky

I can only speak to US practice, but one has to look at the terms and conditions of the loan contract and/or notes. In the US it is common for the lenders to impose a one year residence condition. But sometimes, it is indefinite.

Helen1234

Ah, I see. That is very interesting. Good to know. So, I can do whatever best for us with the future rent. Nice.

Helen1234

Many thanks. The reason why I ask is because I fill in the tax separatedly. I do not want to take my husband into this complicated US tax system. In the future, my husband may work in the different state with me. Therefore, I want to understand whether it is possible to split the potential income to reduce the tax

Helen1234

Ah, I see. I didnt think about it. Thanks