kn___jckt

Hi,

My wife and I are considering purchasing a property in the UK as an investment. We intend to purchase the property with a small mortgage and let it out.

What are the tax implications for the different solutions to purchasing this?

Here's the options I see (please correct me if I am wrong or there are other options)

1. Joint personal purchase. We each own 50% of the property. Would reporting rental income/loss to the IRS be a nightmare? Would we also have to report the asset via the 8938 form? How does the tax treaty come into play?
2. Purchase through a company. We would set up a limited company (50% ownership each). All profit and loss would stay within the company. We would not draw any income from the company.
Would this mean we would need to the 5471?

Which route is more tax efficient and results in the least complexity? I've been reading IRS docs and forum posts and I'm struggling to get to a clear answer.

Cheers!

Hotscot

Where do you live?

kn___jckt

California, USA. I'll update the thread title to be clearer. (actually doesn't look like that's possible, sorry for the confusion)

Hotscot

That's ok.
Welcome!

You're in a community property State anyway so you both own it 50/50. No need to draw up any division documents.
I'd advise against an LLC. No real benefit here. In CA this costs $800 a year, payable immediately and thereafter, with or without profit.
Then there's the costs of setting up an LLC, the two year filing of Statement of Information, $25 just to state that you are still an LLC. $75 if you forget.
Registering with the Secretary of State, etc. Registering for a local business license.
Then the paperwork burden at tax time of having an LLC.

No FATCA required. Just work out your annual income after deductions and report on your joint return. Fairly easy. You'll end up with a number. Turbo Tax will handle it.
Note: If you're paying your mortgage via a UK account then FBAR/FATCA can possibly apply to that account depending.

I think Pulaski has discussed the income and deduction aspects of owning UK property recently.
Search on his name. He sometimes knows a thing or two...

I'm also in CA. We thought of buying a UK property but couldn't be bothered with any hassle.
My philosophy is to keep things simple by streamlining my our assets and keeping them in the USA.
CA property is a good investment in itself, depending, but I tend to go for low cost mutual funds and fully funded retirement accounts like 401K and Roth.

kn___jckt

Thanks for the response!

Oh - I was thinking of setting up a private limited UK company and keeping everything in there.

If we went do the owning it personally route we'd pay the mortgage via a UK Bank account.
My question with that route is how is the double taxation handled/avoided? What if the UK offers relief but the US doesn't? Are the same things deductible? Is there any asset reporting that needs to done?

Pulaski

Any sort of intermediate non-passthrough corp, such as a UK Ltd, will do nothing but add fees and mess up your taxes. An LLC would protect you from getting sued if the whole think turned badly pear-shaped, and still give you the pass-through tax benefits.

All that said, I am not sure why you would want to buy and rent a house 5,000-6,000 miles from where you live - you're locked in to a situation where you're 100% reliant on an agent to manage the property. Unless you're planning to move back to the UK within a few years and see owning a home as a hedge against the movement of property prices, and or to buy while the value of sterling is in a hole, I really don't see that your idea is a good one, …. and especially if the investment was a relatively large percentage of your net worth.

I am often surprised how many people want to rent out one home - that isn't much diversification, unless you have a substantial portfolio of other investments, say a couple of million dollars or more, and if you do have say $2m salted away in cash, shares and bonds, and fancy investing $200k in a rental property in the UK, well, honestly I still don't understand that as rental properties, especially if you only have one, can be a right PITA by all the accounts I have ever heard.

So, back to your tax question - the UK is not at all generous to the taxation of rental income, there isn't much you get to deduct from gross rental receipts, whereas the US is the opposite, with a myriad deductions - mortgage interest, depreciation (1/26½ of the cost of the building/yr, in the US or 1/40, non-US) insurance, management fees, advertising, repairs and maintenance, property taxes, you name it, if it relates to owning a rental property, you can deduct it, such that little or no tax is actually payable in the US - which doesn't help you much if HMRC has already rifled your pockets.

Do some research and you might decide that, all things considered, investing in rental property in the US is a much better bet, not only because HMRC is not at all generous, but also because for the cost of buying one house in many parts of the UK you could buy three or four homes, or a tri-plex or quad-plex in the US and get some diversification of your risk.

Hotscot

Agreed.
Potentially large headache for relatively little gain. If any.

Antihero

i am in exactly the same situation , i am moving to CA but have a UK house which is going up for rent when we move. Reason for this is that we might be back in the future (eg couple of years , ) i am not looking to make money on renting it out more about paying off the mortgage asap and potentially an investment for the future

Pulaski

So by "exactly the same", you mean "similar, but with one important difference": having a house in the UK and deciding to keep it when you leave because you might return, I would argue is fundamentally different from choosing to "invest" in a property in the UK when you live in the US. You have important additional considerations whereas an investor is looking for a return on his investment, and nothing more.

Antihero

Lol ok I missed the investment part..same difference....lol

Hotscot

Incidentally, for OP. You're in CA.
They love taxes.

If you have a foreign company, at some point this may come under the purview of the Feds in your taxes.
Then the State will find out and, get this, may consider your company is 'doing business in' CA, just because you live here.
Then they'll want their pound of flesh, including the $800 annual tax etc...

It does happen.

Pulaski

Worse, if you "leave" the US but don't sever every single connection with the state you lived in, meaning selling any property, closing bank and broker accounts, handing back your drivers license, etc, then some states will continue to tax you as resident, I think with respect to inheritance tax, even if the IRS has decided you are no longer resident and therefore not taxable!