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MequonCPA
MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2323
Experience:  CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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I own a house in England. I want to sell it and buy another

Customer Question

I want to understand what tax I would have to pay and how to ensure I pay the minimum amount necessary. I am a British citizen but hold a green card and have lived in the USA since Aug 2000. The house was our residence in England since 1987. We started renting it out when I started a work assignment in Italy in 1997 and continued renting it out when we moved to Arizona. Our niece is getting married and we'd like to sell the house, buy one where she wants to live and rent it to her at a low rate. In my 2000 Tax return the accountant declared the house as a rental asset placed in service 1/1/2000 at $99100 and Land $37055. We hope to sell it for GBP 280,000 and spend all of it on another house in the UK plus transaction costs and tax liability.
Submitted: 4 years ago.
Category: Tax
Expert:  MequonCPA replied 4 years ago.

Dear erlijyme -

 

As a US resident alien, you are taxed on your world wide income from whatever source derived, unless specifically excluded by the tax code. An outright sale would be included in your US income, but you would be entitled to a credit for UK taxes paid on the sale.

 

It might be possible to do a like-kind exchange (Section 1031) if the transaction hasn't closed yet. However, care must be taken in structuring a like-kind exchange and the services of a real estate attorney, professional real estate broker and/or a competent tax advisor to guide you through the process. I am providing a link to IRS Publication 544. See pages 11 - 18 for a detailed description of the various rules and steps that must be followed to meet the Section 1031 requirements. One of the requirements is that both properties be held for investment or productive use in a trade or business.

 

http://www.irs.gov/pub/irs-pdf/p544.pdf

 

Renting your property to your niece at below market value rent, may mean that the property is probably "Not Rented for Profit". In this situation, you report the rental income on Line 21 of Form 1040, include the mortgage interest (as a second residence) and the real estate taxes on Schedule A. You can also deduct all other rental expenses, repairs, utilities, maintenance, etc on Schedule A as miscellaneous itemized deductions, subject to the 2% of Adjusted Gross Income floor. When combined with the mortgage interest and real estate taxes, these miscellaneous amounts cannot exceed the rent received. See page 17 of IRS Publication 527, and Page 5 of IRS Publication 535 , links below for deduction limitations.

 

http://www.irs.gov/pub/irs-pdf/p527.pdf

 

http://www.irs.gov/pub/irs-pdf/p535.pdf

 

If the "not rented for profit" scenario applies, the Section 1031 exchange provisions would not be allowed, and the gain would be included as taxable income.

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