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US Tax on UK Mortgage 'Gain'

US Tax on UK Mortgage 'Gain'

Old Apr 20th 2017, 5:09 pm
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Default US Tax on UK Mortgage 'Gain'

Hi all,

We're contemplating selling our UK property, which we're well aware would need to be declared on our US tax return, however I'm struggling a bit getting my head around how much tax we'd likely pay on the 'gain' on our mortgage payoff due to the currency changes since starting our mortgage.

I'll explain our scenario a little more.

2009 - House purchased for 200k GBP ($324,675 per https://www.fiscal.treasury.gov/fsre...eExch/1209.pdf)
2009 - Mortgage of 160k GBP ($259,740 per same link)

2017 - House would sell for the same 200k GBP ($250,000 per https://www.fiscal.treasury.gov/fsre...rrentRates.htm)
2017 - Mortgage balance 122k GBP

Now, I know I won't need to pay tax on the sale of the property itself, because there is a 'loss' in the US's eyes. It's the mortgage I'm struggling with. I know that if you remove any capital payments from the equation, I borrowed $259,740, and I need to pay back $200,000 (160k GBP at today's currency rate, assuming no capital paid off). This would be a 'gain' of $59,740 and thus taxed at our tax rate.

However, we've made 38k GBP of capital payments.

I found this thread http://britishexpats.com/forum/usa-5.../#post11578540, with this equation specifically:

If, at the time of repayment, a gain is made, then one may wish to establish the original mortgage amount (L); calculate the most advantageous exchange rate at the time of each individual capital portion of each monthly repayment (P), and subtract the total of the calculations as the repayment amount (R).

L - (P1 + P2 + P3 +P4 + .....et al) = R

This method utilises all the variable exchange rates in existence during the period of the mortgage and would give a much more accurate result.


Let's say, for arguments sake, i have these figures:

L = 160k GBP / $259,740
P total = 38k GBP / $61,688 (I just used the original 0.616 exchange rate)
R = $198,052

Where is my gain here though? If i didn't use the capital payments:

L = 160k GBP / $259,740
R = 160k GBP / $200,000
Taxable Gain = $59,740

I guess I'm just confused about where to subtract my capital payments, whatever the actual figure may be, to offset my phantom gain.

Any advice is much appreciated - there was nothing definitive online that addressed these capital payments online.

Thanks!
Matt
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Old Apr 26th 2017, 9:08 pm
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Default Re: US Tax on UK Mortgage 'Gain'

Matt - the answer you seek is in none of the above. Do you have excess foreign tax credits? Passive Activity Loss carryovers? Depreciation recapture? Is it a QBU? Are you using the optimum exchange rates? Are you aware of various contrary positions that may each have substantial authority even though they are not consistent?
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Old Apr 26th 2017, 10:00 pm
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Default Re: US Tax on UK Mortgage 'Gain'

I believe the gain is the difference between the current USD value of the current mortgage balance and the original USD value of the current mortgage balance. The capital repayments don't figure in the calculation.
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Old Apr 29th 2017, 7:10 pm
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Default Re: US Tax on UK Mortgage 'Gain'

Originally Posted by duvallninja View Post
Hi all,

We're contemplating selling our UK property, which we're well aware would need to be declared on our US tax return, however I'm struggling a bit getting my head around how much tax we'd likely pay on the 'gain' on our mortgage payoff due to the currency changes since starting our mortgage.

I'll explain our scenario a little more.

2009 - House purchased for 200k GBP ($324,675 per https://www.fiscal.treasury.gov/fsre...eExch/1209.pdf)
2009 - Mortgage of 160k GBP ($259,740 per same link)

2017 - House would sell for the same 200k GBP ($250,000 per https://www.fiscal.treasury.gov/fsre...rrentRates.htm)
2017 - Mortgage balance 122k GBP

Now, I know I won't need to pay tax on the sale of the property itself, because there is a 'loss' in the US's eyes. It's the mortgage I'm struggling with. I know that if you remove any capital payments from the equation, I borrowed $259,740, and I need to pay back $200,000 (160k GBP at today's currency rate, assuming no capital paid off). This would be a 'gain' of $59,740 and thus taxed at our tax rate.

However, we've made 38k GBP of capital payments.

I found this thread http://britishexpats.com/forum/usa-5.../#post11578540, with this equation specifically:

If, at the time of repayment, a gain is made, then one may wish to establish the original mortgage amount (L); calculate the most advantageous exchange rate at the time of each individual capital portion of each monthly repayment (P), and subtract the total of the calculations as the repayment amount (R).

L - (P1 + P2 + P3 +P4 + .....et al) = R

This method utilises all the variable exchange rates in existence during the period of the mortgage and would give a much more accurate result.


Let's say, for arguments sake, i have these figures:

L = 160k GBP / $259,740
P total = 38k GBP / $61,688 (I just used the original 0.616 exchange rate)
R = $198,052

Where is my gain here though? If i didn't use the capital payments:

L = 160k GBP / $259,740
R = 160k GBP / $200,000
Taxable Gain = $59,740

I guess I'm just confused about where to subtract my capital payments, whatever the actual figure may be, to offset my phantom gain.

Any advice is much appreciated - there was nothing definitive online that addressed these capital payments online.

Thanks!
Matt
Here is another example

https://www.taxadvisorypartnership.c...nge-rate-gain/
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Old Apr 29th 2017, 8:21 pm
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Default Re: US Tax on UK Mortgage 'Gain'

mortgage isnt considered. difference between start value (at that dates ex rate) and selling value (at that dates ex rate) is the key.


we got hit for a VERY large 'paper' gain because of ex rate changes - because we bought the house years before we even moved to the US. It wasnt fair as we didnt use dollars to pay for it, but we had to pay 70k in tax for the paper gain regardless.

we used an accountant to work it out because it was complicated - and the recent ARM tax factored in. i have no clue how it works but it resulted in us paying more
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Old Apr 29th 2017, 8:34 pm
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Default Re: US Tax on UK Mortgage 'Gain'

Originally Posted by MsElui View Post
mortgage isnt considered. ....
That is what this thread is about - the gain on repaying the mortgage prematurely. Anyone who borrowed at a time when the pound is more valuable than when they sell, and pay off the mortgage, will have made a "gain" because they can pay off the loan with fewer dollars.

It's a very similar reason as why there is a taxable gain on short sale (partial loan forgiveness).

Last edited by Pulaski; Apr 29th 2017 at 9:36 pm.
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Old Apr 29th 2017, 9:00 pm
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Default Re: US Tax on UK Mortgage 'Gain'

Originally Posted by MsElui View Post

we got hit for a VERY large 'paper' gain because of ex rate changes - because we bought the house years before we even moved to the US. It wasnt fair as we didnt use dollars to pay for it, but we had to pay 70k in tax for the paper gain regardless.
(
You can take some comfort in the fact that it would've been worse if you'd been living in California- I see Ohio and Texas under your name, so you either paid no state tax (Texas), or a relatively low rate (Ohio).
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