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USA tax on UK rental income

USA tax on UK rental income

Old Feb 16th 2019, 12:41 pm
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Question USA tax on UK rental income

I submitted my UK tax return for rental income on my UK house. This came within the tax allowance, so I actually had no tax to pay. Will the USA IRS see this as taxed in UK and double tax treaty applies, or see no payment and therefore 100% subject to USA tax?
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Old Feb 16th 2019, 1:12 pm
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Default Re: USA tax on UK rental income

Double taxation generally works on giving you a credit for tax paid where the income is generated, so if the local rate where you live is lower you pay nothing, but if the local rate is higher you pay the difference. You cannot say "I paid 1% over there, so it's already taxed and I'm not paying you any more."

The reality is that you will likely pay very little tax on income from a rental in the UK assuming that you have a mortgage and bought it within the past 20 years. The reason is the laundry list of deductions you make on rental property to reach net taxable income: mortgage interest, depreciation (1/40th the value of the structure, but not the land - rule of thumb is 80% of the purchase price, unless you own a flat where the proportion of the building might be more, or land with development potential in which the building would be a lower percentage), insurance, management fees, marketing costs, depreciation on appliances (generally 20%, but currently 100% in year 1), repairs and maintenance, and pretty much anything else you spend as a result of owning the property. And the result of the mortgage interest and depreciation (which is mandatory) alone is that most of your gross income is wiped out. In fact making a taxable loss is a real possibility, and depending on your income you may even be able to deduct part of the loss from your earned income for tax purposes.

Last edited by Pulaski; Feb 16th 2019 at 1:33 pm.
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Old Feb 16th 2019, 1:30 pm
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Default Re: USA tax on UK rental income

Originally Posted by Pulaski View Post
Double taxation generally works on giving you a credit for tax paid where the income is generated, so if the local rate where you live is lower you pay nothing, but if the local rate is higher you pay the difference. You cannot say "I paid 1% over there, so it's already taxed and I'm not paying you any more.

The reality is that you will likely pay very little tax on income from a rental in the UK assuming that you have a mortgage and bought it within the past 20 years. The reason is the laundry list of deductions you make on rental property to reach net taxable income: mortgage interest, depreciation (1/40th the value of the structure, but not the land - rule of thumb is 80% of the purchase price, unless you own a flat where the proportion of the building might be more, or land with development potential in which the building would be a lower percentage), insurance management fees, marketing costs, depreciation on appliances (generally 20%, but currently 100% in year 1), repairs and maintenance, and pretty much anything else you spend as a result of owning the property. And the result of the mortgage interest and depreciation (which is mandatory) alone is that most of your gross income is wiped out.
thank you for taking time out to give a very detailed answer, however, my question is in how the USA view the rental income, where my tax to pay in the UK was nil due to tax allowance. Will the US consider it to be 100% taxable to them as there is no payment to UK?
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Old Feb 16th 2019, 1:35 pm
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Default Re: USA tax on UK rental income

Originally Posted by suewarm View Post
thank you for taking time out to give a very detailed answer, however, my question is in how the USA view the rental income, where my tax to pay in the UK was nil due to tax allowance. Will the US consider it to be 100% taxable to them as there is no payment to UK?
I answered that in the first paragraph - "You cannot say ....". In other words even if you paid tax in the UK you would still have to include the gross income in your US tax return, with the deductions the US allows, and a credit for tax paid in the UK.

Last edited by Pulaski; Feb 16th 2019 at 1:37 pm.
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Old Feb 16th 2019, 4:02 pm
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Default Re: USA tax on UK rental income

I agree with what Pulaski said. We had a UK rental house for 6 years while living in the USA and during that time my company’s accountants did our tax returns. I had to produce a profit and loss statement along the lines Pulaski detailed for inclusion in our US tax return. We never owed any US tax as it was always a loss. And we never owed any UK tax either.
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Old Feb 16th 2019, 4:38 pm
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Default Re: USA tax on UK rental income

Ok thanks. We do make a profit but not enough to go over the uk tax allowance threshold.
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Old Feb 16th 2019, 5:39 pm
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Default Re: USA tax on UK rental income

Originally Posted by suewarm View Post
Ok thanks. We do make a profit but not enough to go over the uk tax allowance threshold.
As Pulaski has noted, what the profit is for UK taxation may not be the profit for US taxation purposes.
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Old Feb 16th 2019, 6:11 pm
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Default Re: USA tax on UK rental income

Originally Posted by suewarm View Post
Ok thanks. We do make a profit but not enough to go over the uk tax allowance threshold.
But you don't deduct depreciation in the UK, and didn't HMRC also restrict, or eliminate, deduction of mortgage interest?
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Old Feb 16th 2019, 6:15 pm
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Default Re: USA tax on UK rental income

Thanks no mortgage to offset
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Old Feb 17th 2019, 12:18 am
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Default Re: USA tax on UK rental income

Originally Posted by suewarm View Post
Thanks no mortgage to offset
Well on a £200k house (purchase price), you will probably deduct £4k ($5k) in depreciation, being £160k/40).
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Old Feb 17th 2019, 12:22 am
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Default Re: USA tax on UK rental income

Originally Posted by Pulaski View Post
But you don't deduct depreciation in the UK, and didn't HMRC also restrict, or eliminate, deduction of mortgage interest?
They did, it was 100% deductable in the UK until 2016/17 it is now phasing out. from 2017-2018, this relief is being scaled down so that landlords can only deduct 75% of their mortgage interest. This will drop to 50% in 2018-2019 and 25% in 2019-2020. From the 2020-2021 tax year, you won’t be able to deduct mortgage interest at all.

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Old Feb 17th 2019, 12:45 am
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Default Re: USA tax on UK rental income

Originally Posted by Mercury39 View Post
They did, it was 100% deductable in the UK until 2016/17 it is now phasing out. from 2017-2018, this relief is being scaled down so that landlords can only deduct 75% of their mortgage interest. This will drop to 50% in 2018-2019 and 25% in 2019-2020. From the 2020-2021 tax year, you won’t be able to deduct mortgage interest at all.
Yes, it's quite a significant change especially for those in higher tax brackets. The new system still allows tax relief in the form of a 20% tax credit on mortgage interest, the table in this article explains the phasing in https://www.which.co.uk/money/tax/in...d-atnsv0j6j782
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Old Feb 20th 2019, 3:14 pm
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Default Re: USA tax on UK rental income

Originally Posted by spouse of scouse View Post
Yes, it's quite a significant change especially for those in higher tax brackets. The new system still allows tax relief in the form of a 20% tax credit on mortgage interest, the table in this article explains the phasing in https://www.which.co.uk/money/tax/in...d-atnsv0j6j782
It will be interesting to see if rents start to rise to mitigate this effect. Hopefully it will make house prices come down a bit. However there a fair number of people leaving the UK since Brexit. There are a few empty rental houses from what I hear.
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Old Feb 20th 2019, 3:29 pm
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Default Re: USA tax on UK rental income

Originally Posted by mrken30 View Post
It will be interesting to see if rents start to rise to mitigate this effect. Hopefully it will make house prices come down a bit. However there a fair number of people leaving the UK since Brexit. There are a few empty rental houses from what I hear.
Any data to backup what you hear? Just this week the latest figures show net migration in 2018 at over 300k. Falling migration for sure but still positive. Non-EU migrants in 2018 outnumbered EU migrants by 3 to 1, and there is still a severe housing shortage including rentals.

https://www.theguardian.com/uk-news/...most-six-years

https://www.independent.co.uk/news/u...-a8356646.html

https://www.bbc.co.uk/news/business-45113867




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Old Feb 20th 2019, 3:47 pm
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Default Re: USA tax on UK rental income

Originally Posted by durham_lad View Post

Any data to backup what you hear? Just this week the latest figures show net migration in 2018 at over 300k. Falling migration for sure but still positive. Non-EU migrants in 2018 outnumbered EU migrants by 3 to 1, and there is still a severe housing shortage including rentals.

https://www.theguardian.com/uk-news/...most-six-years

https://www.independent.co.uk/news/u...-a8356646.html

https://www.bbc.co.uk/news/business-45113867




I just heard from friends back home that the largish Polish and Romanian population appears to have declined considerably. Most of the houses were rented to low paid laborer type people. They were HMOs, housing about 10 people in a 3 bed house. This was in the home counties where rental prices are quite high. I agree is is a very narrow scope, I'm sure there are other places where this is not happening.

It looks like there may be a glut of empty rental homes, this may explain the decline in rents. Maybe it's just a coincidence.

https://www.theguardian.com/money/20...me-in-a-decade

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