packeted

Hey folks,

I own one property in the UK (my only) that I have rented out for over a decade since buying in 2004. My wife and I have been in the US for 5 years and finally got our green cards at the end of last year.

I'm considering selling the property in the UK to help with a downpayment here. I've looked in to the UK side of the capital gains and it looks like the rules on non-resident capital gains changed and it is now taxable, but against the value of the property on April 2015 - which is likely to be pretty similar to the current value - so potentially little or not CGT payable in the UK.

I'm wondering what CGT would be payable here and what the gains would be assessed on? Would it be the current value - the value of the property when I became a LPR? Or would they look back to the price paid in 2004? Would the outstanding mortgage be deducted from the taxable gains?

Appreciate the advice!

Cook_County

From a US perspective you will pay tax on any gain (using spot rates on the dates of acquisition & disposal). You will also need to recapture allowable depreciation, but can offset the gain by any suspended passive activity losses. You can reduce the tax by any excess foreign tax credits you are carrying forward in the passive basket.


Separately, because of the sharp decline in Sterling, you will owe US tax on a large foreign currency gain.

packeted

Thanks Cook! Quick question about Sterling - wouldn't it work in my favor? Ie in 2004 it was $1.8 = 1 GBP, so the dollar value was higher back then vs $1.3 = 1 GBP, in effect increasing the dollar value of the property when purchased, reducing the dollar value of the property when sold, making the gain appear smaller?

Pulaski

That's half right, but from the US perspective the movement in the exchange rate reduced your liability, not your asset - and a reduction in a liability is a gain!
This could create a scary number for Packeted.

The capital gain on the payoff of your mortgage is created because it took fewer dollars to pay off the balance than you received when you took out the mortgage. Say you borrowed £120,000 when the exch rate was $2/£1, so you borrowed $240,000 from the IRS's perspective. Several years later, after you have paid off £20,000 and moved to the US you sell the house and pay off the mortgage. The exch rate is now $1/€1, so you pay £100,000, but at today's rate, from the IRS's perspective, it only cost you $100,000, not the $200,000 (paid down part of what) you received. You have a taxable gain of $100,000!

In short, it's the difference between the current dollar value of the mortgage payoff amount and the dollar value of the mortgage payoff amount at the exchange rate on the day you originally took out the mortgage (or most recent refinance if you have refi'ed previously).

mrken30

Have you been depreciating your property by 1/40 th of the building value every year and deducting it from your taxes? The IRS will assume that you have been. This will also increase your CGT.

Pulaski

In other words, reclamation of depreciation is mandatory in the final sale tax computation even if you didn't claim depreciation each year on your tax return while it was rented out.

newadventure

Sorry Pulaski, i don't understand this. Surely the OP is correct with respect to the US CGT - the reduction in GBP/USD means the dollar gain on the value of the house is smaller, therefore less US CGT? I realise that the same reduction in GBP/USD will increase any FX gain assuming the OP has a mortgage

mrken30

You are correct with the gain on the house. If the OP had no mortgage, or carried on paying the mortgage to the end of the loan period, only the value of the house would come into play.

However he took out a loan to buy the house. This is like playing the FX trading gain. I take out a loan to buy £1000 at 2:1 exchange rate, costs me $2000. I pay off £500(1/2) of the loan , I have £500 left to pay off. Say the exchange rate is now 1:1, to pay off that loan, it now only costs me $500, instead of $1000(1/2 of $2000), so I have saved myself $500 of payments, hence a gain of $500. If it was an interest only loan, you would have saved $1000.

packeted

Thanks for the discussion. Just to add a little more context, there is a mortgage but as with most things bought in 2004 it is now only a small percentage of the property value (25%).

Pulaski

Yes, you are correct.
This is also correct, and the loan was the only thing I was referring to in the part of my post that you quoted. In fact if you look back, the post I was replying to only asked about the mortgage loan.

newadventure

Splendid!