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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
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Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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Hi, We have been resident outside of the UK for 3 years

Resolved Question:

Hi,

We have been resident outside of the UK for 3 years now and have just moved to the USA for a further 2 years. We have an offer on our main residence in the UK so we would like to sell it but I am concerned about the USA tax situation. I understand the UK tax side.

For example, we bought the house in 2000, will sell in 2011, we occupied it for 71/4 of those years and the rest of the time (since March 2008) it has been rented. Let's say when we sell it, we make say 100,000 GBP profit (although actual realized cash balance would be less as we have a mortgage o/s). How would the USA CGT work as we would need meet the 2 out of 5 years exemption rule. Would we be liable to pay 15% tax on the entire profit, regardless of mortgage or anything else? Are there any other exemptions we should be aware of? Also, someone mentioned there could be an FX rate issue to.....? Any advice would be greatly received.

Thanks
Sue
Submitted: 3 years ago.
Category: Tax
Expert:  Arthur Rubin replied 3 years ago.

Arthur Rubin :

I'm afraid I don't understand the UK side, and it affects some of the options you have later, so bear with me....

Arthur Rubin :

Unless you sell within 3 years of when you moved out, you will not satisfy the 2 out of 5 years exemption. To be precise, you have to have lived in the house as your principle residence for 710 days in the 5 years before the sale. I don't think you'll make it.

Arthur Rubin :

The fact that it's presently a rental makes the matter more difficult, as well. Basically, if you're a US resident, you need to be paying taxes on your world-wide income, include the rental income/loss.

Arthur Rubin :

But the gain (based on the US$ basis and and the US$ sales price) is taxed at a maximum of 15%. In addition, any depreciation on the structure that you claimed or should have claimed on the rental is recaptured at a maximum of 25%.

Arthur Rubin :

Finally, you can claim the Foreign Tax Credit for (approximately) the lesser of the UK tax due to the sale and the US tax due to the sale. It's probably best to use the "accrued" option on form 1116 so that the credit is properly aligned with the tax paid.

Arthur Rubin :

Alternatively, you can take the UK tax as an itemized deduction (under "taxes") on your 1040 Schedule A.

Arthur Rubin :

There should be a FX rate issue on the mortgage repayment, as well. I'd have to research how to compute that, and the nature of the gain/loss.

Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1245
Experience: 22 years of tax preparation experience, including individual, trust, and estate returns.
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