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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4066
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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I am a US citizen living in the UK If I were to remortgage

Resolved Question:

I am a US citizen living in the UK If I were to remortgage a rental propery in the UK in order to raise a deposit to buy a new property - which would then be my permanent residence - is the equity raised subject to capital gains or other tax penalties.

Since my mortgage on the property would increase, I assume I'd be able to deduct the interest? So I would hope that ultimately it would be beneficial from a tax perspective?

Thank you.
Submitted: 1 year ago.
Category: Tax
Expert:  Stephen G. replied 1 year ago.

Stephen G :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything that is not clear.

Stephen G :

The equity raised would not be subject to capital gains taxes.

Stephen G :

The interest on the borrowing would not be deductible on your rental property schedule as the proceeds would not have been used to acquire or improve your rental property.

Stephen G :

Technically, in order to deduct your mortgage interest on your home, it has to be related to debt subject to a mortgage on your personal residence, even a second mortgage.

Stephen G :

I've seen what you are trying to do accomplished via a "blanket mortgage" where both properties support all of your borrowing, but that may not be a practical solution in the circumstances you describe.

Customer:

I would have a separate mortgage on the new property. I assume that I could deduct the interest on that mortgage still?


 

Stephen G :

If the new property would be your personal residence, then any interest expense related to borrowing supported by a mortgage on that property would be deductible on Schedule A.

Customer:


So just to clarify, I would pay full tax on all of the rental income from that property.

Stephen G :

I don't know what you mean by that - are you talking about the existing rental property?

Customer:

yes

Stephen G :

It already has a mortgage that you are deducting the interest on and you would be able to continue to be able to deduct that interest expense.

Customer:

To be honest the current mortgage is very small $30,000. Effectively, with the remortgage, the new lender would pay off the existing mortgage on the rental property - it would become part of the new mortgage. How would I work out the deduction?


Is there a more practical way to do it? I don't want to live in the rental property since it's too small so rather than continuing to pay rent myself I'd rather us the equity in my rental property to buy a new larger place.

Stephen G :

You would have to allocate $30,000. to the existing rental property and deduct that % of the total interest to the rental property. So for example if the total new borrowing was $60,000., then 50% of the interest would be deductible on your Schedule E for the rental property.

Stephen G :

If you need to contact me again with any tax or financial questions, you can just ask for "Steve G" at the beginning of your question. Again, please remember to rate my response. Bonuses, where you think they are warranted, and excellent ratings, are always most appreciated. Thanks again for using JustAnswer.com.

Customer:

Thank you.

Stephen G :

You are very Welcome.

Customer:

I'm sorry I do have one more related question if that's OK

Stephen G :

sure

Customer:

If I were to sell the rental property eventually, would I pay capital gains on the gain after paying off the entire new mortgage.

Customer:

eg if the property is worth 100k, I currently owe 30K and I'm raising an additinal 30k. If I sold it for 100K would I pay capital gains on 40,000 or 70,000

Stephen G :

The mortgage has nothing to do with the computation of the capital gain so that is not an issue. Your gain would be determined based upon the adjusted tax basis of the property compared to the net selling price of the property.

Customer:

I don't understand that

Stephen G :

You aren't going to get a tax deduction in the computation of the gain for debt that wasn't used to purchase or improve the property sold; you also aren't going to get a deduction for property you financed and depreciated fully, but haven't fully retired the debt.

Customer:

to clarify what is the adjusted tax basis of the property - how is is calculate

Stephen G :

The financing doesn't enter into the computation of the taxable gain.

Stephen G :

The adjusted basis equals the original cost, plus improvements, less depreciation.

Customer:

OK thanks a lot for your help.

Stephen G :

OK, please remember to rate my responses.

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4066
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 8 other Tax Specialists are ready to help you

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