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Ask Dr. Fiona Chen Your Own Question
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 300
Experience:  Former IRS Revenue Agent
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The taxpayer transfers $200,000 in 2010 to the UK to buy GBP

Customer Question

The taxpayer transfers $200,000 in 2010 to the UK to buy GBP 117,000 for down payment on a primary residence costing GBP 300,000 at an exchange rate of 1.70. She assumes a UK mortgage for the remaining GBP 200,000 and pays it off in UK earnings by 2014, when the exchange rate has declined to 1.60. In 2016 she sells the primary residence for GBP 500,000 and puts these funds in a US trust account as a sterling asset.
The exchange rate is now 1.30. As a UK resident but US citizen, is tax for a currency gain owing on:
The mortgage amount of $200,000 retired 2 years before the sale?
Presumably no CGT tax is due on the primary residence which cost $510,000 equivalent and sold for $650,000 equivalent, thanks to the fall in GBP, and has been lived in for 6 years.
JA: The Accountant will know how to help. Is there anything else the Accountant should be aware of?
Customer: That's the full story. Taxpayer is UK tax resident but US citizen. Thanks!
Submitted: 1 month ago.
Category: Tax
Customer: replied 1 month ago.
Mortgage is originally GBP 183,000 not GBP 200,000.
Expert:  Dr. Fiona Chen replied 1 month ago.

Dear Customer,

I will work on the problem on a spreadsheet and come back to you, soon. This is not so easy; therefore, give me some time.

In the meantime, please give me some specific questions you have. That could be helpful.

Thank you.


Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Expert:  Dr. Fiona Chen replied 1 month ago.

Dear Customer,

1) U.S. citizen is taxed on worldwide income.

2) In your first paragraph, the primary residence cost GBP 300,000 in 2010.

In your third paragraph, this residence cost GBP 510,000.

3) I think you meant that the house is sold higher than U.S. $250,000 home owner exemption exclusion. Please double check on both U.K. and U.S. law to make sure that the gain on the house sold is reported properly. This is the portion you want me to assume with no problem.

4) It seems that your question is on whether we need to report earnings on foreign exchange rate.

Foreign exchange rate dealing is a common way to make money and invest.

Yes, earning on foreign money trade and exchange needs to be recognized as income.

The mortgage was taken out in British Pound and paid in British Pound. There is no exchange rate difference.

5) In the taxpayer's situation, the only number in question is the 200,000 in 2010. But she was not a corporation engaging in the investment activity. The exchange rate happened in between 2010 and 2016 for six years should not be an investment issue. That is, if she is on the other side loosing big for that type of currency exchange, she cannot claim loss. Also, if she stays in the same country, there is no issue.

At the moment when she move money to another country, she may experience increase. But if she stays, she should realizes the difference of living standards, etc., those money will be gone soon.

In her situation, there is no foreign exchange gain issue. If she moves the money back to U.K. the next day, she will lose all these phantom gain. However, if she actively trades exchange rates, she will be liable for the proper reporting of the gain of such trades.

6) Be award of this Sterling asset she is investing. It may not be sound, and bona fide investment. Double check.

Please feel free to follow up.



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