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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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Is foreign currency exchange gain/loss on a rental property

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Is foreign currency exchange gain/loss on a rental property mortgage supposed to be reported annually, or at the end of the mortgage?

Lev :

Hi and welcome to Just Answer!
When rental income is received - income must be reported in US dollars converted based on the currency conversion rate in effect on the date when income is received.
When a foreign currency is actually converted into US dollars - and if you have a gain on that conversion - that is reported separately as conversion gain regardless how income originally was received.

Lev :

If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.

Customer:

Thanks, XXXXX XXXXX question was related to mortgage payments. Let's say you take out a mortgage loan for 10,000 euro, to be repaid in annual installments of 1000 euro, and that at the time the mortgage is originated the dollar:euro exchange rate is 1:1. Then a few years down the line, the exchange rate changes to 2:1, so your mortgage payments now only cost $500 per year. Do you report a $500 capital gain each year?

Customer:

Sorry, make that "the exchange rate changes to 1:2"

Customer:

And would it be a capital gain or ordinary income? I'm not a tax expert by any means, but my reading of Section 988 is that currency exchange gain/loss associated with a rental property is ordinary income/loss

Lev :

When you make mortgage payments - a part of it is interest and part is a principal.
The interest part is deducted based on conversion rate when paid.
On the payment of the payment related to principal - you may realize the gain because of the difference in currency conversion rates - and that gain is above $200 per year - is reported as a capital gain.

Lev :

It should be reported as a short term capital gain - not long term - and ordinary tax rates should apply.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience: Taxes, Immigration, Labor Relations
Lev and 2 other Tax Specialists are ready to help you

Hi! Welcome to Just Answers! I have an answer that is different from the above expert. My area of expertise is international taxation. I have run across your situation many times.

 

IRS Rev. Rul. 78-281 provides:

The basis of business property purchased with foreign currency borrowed from a foreign bank prior to the devaluation of such currency is the equivalent in U.S. dollars of the cost of the property on the date of the purchase, and an ordinary gain or loss is realized on each subsequent loan payment to the bank equal to the difference between the original U.S. dollar value of that portion of the loan principal discharged and the U.S. dollar value of the currency used to make the repayment on the date such payment is made.

 

So, you would take each payment, using the exchange rate in effect at the time of the payment, and compare it to the original exchange rate at the mortgage origination. So you would have an ordinary loss for each payment, based on the exchange rate for that payment.

 

It is NOT a capital loss! This is actually an important characterization, as capital losses are limited to $3,000 per year, and ordinary losses are not limited.

 

I hope this answers your question! If you have any more, please let me know, I would be happy to answer. If you have found my answer helpful, please rate me highly! I would appreciate it!

 

Thanks!

 

Roger

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