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US Tax: Depreciation on leasehold rental property in UK

US Tax: Depreciation on leasehold rental property in UK

Old Jan 5th 2018, 2:58 pm
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Default US Tax: Depreciation on leasehold rental property in UK

Ya'll

I moved to the US and still own my leasehold flat in London, which I rent out to cover the mortgage, as you do. I've been reading up on depreciation and that if you don't take it, you lose it, as the IRS will tax you on the depreciation that you should have taken on your rental property (depreciation recapture).

I am asking my accountant the same questions and I will update here when I get info but I think it might be a specialised knowledge area so I am reaching out to those who may have had similar experience.

1) Can depreciation be applied to a leasehold flat? The leasehold has 101 years when I bought it and 96 left now.

Assuming it can...

2) Depreciation should be applied to only the building and not the land, but with a leasehold you neither own the land nor the building, you just own a lease to use the building within the rules of the lease. So what would the ratio of land to building be? With a leasehold you pay ground rent so you definitely don't own the land so is the depreciation going to be against 100% of the purchase price of the lease?

3) Depreciation can only be claimed on the income from the property, not your day job income. So if your HOA, utilities etc plus depreciation amounted to more than your income, would you still have to claim the full depreciation and basically claim a loss for the year or could you avoid claiming all the depreciation and therefor lower your depreciation recapture when you sell?

Based on what I have read around I assume that one would post a loss for the year on the rental property and roll over the loss to the next tax year, so

4) If you roll over $5k of losses to the next tax year and then sell the property that year with potential further losses, could you claim the $5k+ against the depreciation recapture or would it be claimed against your overall income for the year (including day job income)?


Basically, I am planning to sell my home this year and I want to avoid deprecation recapture as my income on the flat is lower than the cost when taking deprecation and I will not have a chance to make it back before selling it so it's completely counterproductive to me unless it can be claimed back on other income or taxes at time of sale (I expect no capital gains taxes as I have lived in it for 2 out of past 5 years and gain will be less than $250k). Has anyone else successfully and legally avoided using depreciation on a UK leasehold flat?

Cheers,
James
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Old Jan 5th 2018, 7:19 pm
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Default Re: US Tax: Depreciation on leasehold rental property in UK

Use turbo tax and it will help. Overseas property is depreciated over 39 years not 27.5. This may have changed in the tax reform. I know commercial has gone from 39 years down to 25 years.
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Old Jan 5th 2018, 8:25 pm
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Default Re: US Tax: Depreciation on leasehold rental property in UK

Maybe a lease could be treated in a similar way to a franchise. A lot of leases holds have an option to renew at the end of the lease.
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Old Jan 5th 2018, 9:00 pm
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Default Re: US Tax: Depreciation on leasehold rental property in UK

These are clearly questions to ask of a professional. They are very common and any tax adviser who handles these issues every day should be able to advise.
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Old Jan 5th 2018, 9:22 pm
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Default Re: US Tax: Depreciation on leasehold rental property in UK

Originally Posted by Cook_County View Post
These are clearly questions to ask of a professional. They are very common and any tax adviser who handles these issues every day should be able to advise.
I don't think leaseholds are very common in the US. The closest is probably a condo.
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Old Jan 6th 2018, 12:34 am
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Default Re: US Tax: Depreciation on leasehold rental property in UK

Originally Posted by mrken30 View Post
I don't think leaseholds are very common in the US. The closest is probably a condo.
Condo is quite different. I seem to recall that long-term land leases are or were common in Hawaii. They used to be common on Orange County CA but that is a story in itself.

I agree that professional advice is required. I'm not even sure if depreciation recapture is required here. I don't know.
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Old Jan 6th 2018, 5:07 am
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Default Re: US Tax: Depreciation on leasehold rental property in UK

Originally Posted by S Folinsky View Post
Condo is quite different. I seem to recall that long-term land leases are or were common in Hawaii. They used to be common on Orange County CA but that is a story in itself.

I agree that professional advice is required. I'm not even sure if depreciation recapture is required here. I don't know.
I was thinking that the land in a condo purchase is like a long term lease, but you own the building. You pay HOA fees , similar to paying ground rent on a leasehold property. But I agree professional advice is required. The problem is, most US based CPAs probably don't know what a leasehold property is. Let alone the fact that some leases are 999 years.
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Old Jan 6th 2018, 7:32 am
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Default Re: US Tax: Depreciation on leasehold rental property in UK

Originally Posted by mrken30 View Post
I was thinking that the land in a condo purchase is like a long term lease, but you own the building. You pay HOA fees , similar to paying ground rent on a leasehold property. But I agree professional advice is required. The problem is, most US based CPAs probably don't know what a leasehold property is. Let alone the fact that some leases are 999 years.
Not really, HOA fees are more the equivalent of the service charge you pay on a UK leasehold. The ground rent is quite different, and emphasises the basic legal fact that you don't own the freehold.
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