Marc_ely

I am renting out my house in the UK and I am trying to work out my tax liability for declaration to the IRS at the end of the year.

I've been through the IRS info (Publication 527 (2013), Residential Rental Property) and read posts on here.
I couldn't find any full examples though...

Would anyone that has done this process kindly have a quick look at my figures?

Rental Income gross £1300
- Maintenance -£200 (estimate based on stuff so far)
- Depreciation -£859 (based on 40 yr, property value £400k)
- Management fees -£130 (10% to agent)
- Mortgage Interest -£249
- Insurance -£20
_______
-£158

Depreciation was based on an online calculator and a 40yr timescale:
Property Depreciation Calculator: Real Estate
Using a $686k current market value and 40 years it gave $16,500 for the first year.

So based on this it would appear I am making a "loss" for tax purposes.

Cook_County

Unless it is in a QBU the depreciation is based on the FMV of the building (but not the land) when placed in service; probably using a mid-month convention for the first month rented - and converted into US$ using the spot rate on the date placed in service.

Please provide your workings.

Marc_ely

Well to give you an idea of how little I know about this stuff I had to google QBU and FMV! I've recalculated based on your info snippets.

I started renting it January 15th 2014. The exchange rate that day was £1.61 per $ (according to XE.com)

The FMV of the property (building and plot its on) is about £400k, or about $644k at the rate that day we started renting it.

I read that the house is foreign rental so 40yrs depreciation applies.
Plugging those numbers into the calculator gives depreciation schedules of:

Year Depreciation Expense
2014 $15,429
2015 $31,529
2016 $47,629

So it's a little less than I first calculated, but in the same ballpark.

Then to see the monthly just divide by 12, giving $1,285.75 per month.

Pulaski

You depreciate on COST (actual number of GBP handed over to the seller when you bought it), not value, even if you bought it 20, or more years ago; you can also add capital expenditures, such as an extension to the "base cost", which must be supported by receipts and invoices.

And as already advised, you need to strip out the value of the land. In the absense of any clue as to the value of the land, 20% of the cost of the "house + land" is a good starting point/ estimate. Also, it is going to be exactly the same number of GBP each year, unless you have capital (depreciable) improvements or expenditures e.g. an extension or new roof. The depreciation does not escalate dramatically each year as your draft numbers do.

Marc_ely

OK so the cost is going to be around £380k and I will take off 20% for the land. So I get around £304k as the base value figure.
Using the exchange rate on the day it rented I get $489k dollar value.
Plugging the numbers into the calc I then get $11,716 or just under $1k a month.

Is that then right?

Pulaski

By my reckoning, $489,000 over 40 years is just over $1,000/mth, but it's certainly in that ballpark.

Oh, and you don't claim maintenance based on an estimate. You keep receipts and invoices and claim strictly on actual expenditure.

JAJ

As far as I know you use the exchange rate based on when you purchased the property, not when you started renting it, as your cost base. With a separate calculation if you have since done any capital improvements to the property.

Be aware that if you sell the property, you will have to add/re-capture the depreciation you have claimed back to your cost base and it is taxed at a special rate (25%, from memory), higher than the long term capital gains tax rate.

Pulaski

I might be wrong, but I thought depreciation was fixed (1/40th every year for 40 years) in GBP, but translated to USD every year at the rate used to convert the income. .... The OP should consider getting some professional help/ advice, at least for the first year of tax returns.

Cook_County

I typed wrong. The basis for depreciation is the lower of the cost on the date acquired (plus costs of purchase and improvements) or the FMV on the date first placed in service, excluding the cost of the land.

Unless it is a QBU (in which case Pulaski is correct) the exchange rate is the date of purchase.

Depreciation on foreign property is straight line, with a mid month convention for the first month placed in service.

The spot exchange rate on 01/15/14 for cash was 1.5475 according to OANDA; you have probably just looked at the Interbank rate.