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US Capital Gains on UK property

US Capital Gains on UK property

Old May 30th 2017, 8:37 pm
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Default US Capital Gains on UK property

Hello
1. Can anyone recommend a good tax advisor that has UK and US expertise, for UK citizens now resident in US?

2. if you have any experience with the following I would welcome any insights before choosing a tax professional.

This is the situation we own a house in the UK we are trying to decide if selling it now will open us up to a world of pain (tax) or if holding onto it until we move back to the UK in 2 or 3 years would make better financial sense?

The details
We bought in 2006 for £265k
We have had an offer for £335k
We have <60k left to pay on mortgage
We rented the property for the past 4 years. The rental income was under £11k threshold.
Is it correct capital gains tax in US will be zero as we will pay 28% in UK due to reciprocal agreement we will not pay 20% in US?
Once we sell the house we will be over $100,000 threshold in our UK bank accounts is this then subject to tax in US under FBAR/Fincen 114?
Any information on this greatly appreciated.
Thanks
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Old May 30th 2017, 10:04 pm
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Default Re: US Capital Gains on UK property

As the property has been rented out the sale will permit you to claim any suspended passive activity losses but will require you to recapture depreciation allowable since it was first rented.


Because of the sharp decline in Sterling; there could be a loss on the sale of the property in US dollars; but inevitably will be a large currency gain on repaying the foreign currency mortgage.


Why would you owe 28% in UK CGT on the gain?
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Old May 31st 2017, 7:15 pm
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Default Re: US Capital Gains on UK property

Hi
Thanks for the response. Suspended activity losses - I'm not familiar with this how are these calculated?
The currency exchange as there is a loss does this mean we pay no US capital gains?
'but inevitably will be a large currency gain on repaying the foreign currency mortgage' - yes do you know tax implications in US for this?
I couldn't find an explanation of 18% ctg vs 28% so assume the worse until I'm told otherwise.
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Old Jun 1st 2017, 6:56 am
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Default Re: US Capital Gains on UK property

Have you included IRS Form 8582 and 1116 in your US returns?
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Old Jun 1st 2017, 11:06 am
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Default Re: US Capital Gains on UK property

The UK capital gains tax may be much less than 18% or 28% of the gain. More information here:
https://www.gov.uk/tax-sell-home
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Old Jun 1st 2017, 2:21 pm
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Default Re: US Capital Gains on UK property

just know that the IRS calculates the change in value from the day you BOUGHT the house (and the equivalent exchange rate) and the date you sell the house (as the equivalent exchange rate). So if the exchange rates go the wrong way - you are judged to have made a large PAPER gain (even though when you bought the US was NOT in the picture!)

ie we bought in 2001 but didnt move to the US until 2007. we sold the house in 2015 - so the exchange rate from 2001 to 2015 was horrible and we ended up owing a very large sum to the irs - even though in pounds the gain was quite modest. (bill closer to 6 figures than 5 figures!!!!!)
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Old Jun 1st 2017, 3:21 pm
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Default Re: US Capital Gains on UK property

Originally Posted by MsElui View Post
just know that the IRS calculates the change in value from the day you BOUGHT the house (and the equivalent exchange rate) and the date you sell the house (as the equivalent exchange rate). So if the exchange rates go the wrong way - you are judged to have made a large PAPER gain (even though when you bought the US was NOT in the picture!)

ie we bought in 2001 but didnt move to the US until 2007. we sold the house in 2015 - so the exchange rate from 2001 to 2015 was horrible and we ended up owing a very large sum to the irs - even though in pounds the gain was quite modest. (bill closer to 6 figures than 5 figures!!!!!)

In this situation because of the decline in Sterling the opposite is likely to be true; except for the foreign currency mortgage - which will probably result in a significant level of US taxable income.
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Old Jun 1st 2017, 6:09 pm
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Default Re: US Capital Gains on UK property

I'm in this exact scenario now and am looking at a taxable capital gain due to forex fluctuations of c.$50k.

I'm in the process of doing more research into this in the hope that it isn't as cut'n'dried as it appears.

My current focus is on my tax status and the fact as I am still classified as a nonresident alien (https://www.irs.gov/individuals/inte...ien-tax-status). I have read conflicting reports on the IRS' appetite to pursue NRAs for tax on foreign currency gain.
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Old Jun 1st 2017, 8:44 pm
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Default Re: US Capital Gains on UK property

Originally Posted by jammiie View Post
I'm in this exact scenario now and am looking at a taxable capital gain due to forex fluctuations of c.$50k.

I'm in the process of doing more research into this in the hope that it isn't as cut'n'dried as it appears.

My current focus is on my tax status and the fact as I am still classified as a nonresident alien (https://www.irs.gov/individuals/inte...ien-tax-status). I have read conflicting reports on the IRS' appetite to pursue NRAs for tax on foreign currency gain.
If you are correct that you are an NRA; the United States only charges you tax on US source ECI (effectively connected income)
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Old Jun 1st 2017, 9:14 pm
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Default Re: US Capital Gains on UK property

Originally Posted by Cook_County View Post
If you are correct that you are an NRA; the United States only charges you tax on US source ECI (effectively connected income)
It is my belief that I would fail the Substantial Presence Test as I have not been present for 183 days during the last 3 years and therefore would be considered an NRA.

You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least:
31 days during the current year, and
183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
All the days you were present in the current year, and
1/3 of the days you were present in the first year before the current year, and
1/6 of the days you were present in the second year before the current year.
I arrive in the US next week and my house sale is 6-8 weeks from completion. So will hit the current year 31 day quota, but none of the 2 years immediately before that.

In your opinion, do I interpret this correctly?
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Old Jun 2nd 2017, 12:21 am
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Default Re: US Capital Gains on UK property

Originally Posted by Cook_County View Post
Have you included IRS Form 8582 and 1116 in your US returns?
Not to date,below threshold in UK so I haven't filed any UK income tax since I became resident on the US.
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Old Jun 2nd 2017, 2:32 am
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Default Re: US Capital Gains on UK property

Originally Posted by Aoi View Post
The UK capital gains tax may be much less than 18% or 28% of the gain. More information here:
https://www.gov.uk/tax-sell-home
Thanks I had a quick run through the non resident tax calculator, works out just under £9k so better than expected.
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Old Jun 2nd 2017, 2:45 am
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Default Re: US Capital Gains on UK property

My main concern now is if the US will tax the income from house sale as foreign income? Does anyone know this?
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Old Jun 2nd 2017, 7:21 am
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Default Re: US Capital Gains on UK property

Originally Posted by Dooron View Post
My main concern now is if the US will tax the income from house sale as foreign income? Does anyone know this?
If you are a US resident when the property is sold the US will charge tax on the gain on the property (after letting you claim any suspended passive activity losses); on depreciation allowable (which will be recaptured) and on a substantial foreign currency mortgage gain. You may be able to ameliorate the tax to some degree by using excess foreign tax credits.
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Old Jun 5th 2017, 5:42 pm
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Default Re: US Capital Gains on UK property

Thanks for the information everyone. I've been reading up on foreign mortgage exchange rate gain taxation...it seems crazy that this is calculated on total mortgage amount rather than the mortgage balance or the years that I've actually been in the US. Can anyone point me in the direction of information on how to mitigate this, foreign tax credits were mentioned how do I calculate these?
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