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bigduckontax
bigduckontax, Accountant
Category: UK Tax
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My Questions are related to Dual-Taxation Treaties between

Customer Question

My Questions are related to Dual-Taxation Treaties between the UK and the USA. And the treatment of (1) Rental Income of UK Property and (2) The Capital Gains from a sale of a UK property within the USA Tax Returns.
Key Facts:
- I am a US Citizen, who resides in Houston, Texas, USA, and I file my USA Taxes using the Filing Jointly Option with my wife.
- I have owned a Flat in London (UK) since May 1999, and we lived in it as our Primary Residence for approx. 13 months until July 2000. The flat has been rented since then we moved back to USA in mid- 2000.
- I File my UK tax Return Annually utilizing HRM Online Services. Due to low annual net rental income from the UK Property, I usually have Zero tax liability within the UK online tax return system.
Question # 1. Treatment of UK Income in the US Tax Return, Do I have an obligation to report the Total Income and Expenses from the UK Property within the US Tax Return, event though there is Zero Tax Liability for UK Tax due to allowed deductions etc. Can you please guide me in detail for the best way to report the UK Tax Income in-light of available options.
If so what gets declared and where on the US Tax return? Is there a way we can benefit from the Dual Taxation Treaties? And How?
Concern: My tax filer in the US is not aware of the joint treaties and he is proposing adding the UK Property as a Rental Property in Schedule E - Supplemental Income and Loss.
The problem with approach is that I have to pay Tax at 25-30% on the total net income in the USA. Whilst I have Zero Tax Liability within the UK Tax Filing.
Question # ***** Treatment of Capital Gains Tax from the Sale of Property in the UK in the USA Taxes.
We are planning to sell our UK Property within 2016, and take advantage of Zero Capital Tax Benefit offered by The Inland Revenue Service for NON-RESIDENT Residential Property Sale. Where if a property is sold prior to Oct 6th 2016 Zero tax will be due. And I also got this confirmation from the IR Customer Service Line dedicated for the Capital Gains.
See Links below:
www.gov.uk/guidance/capital-gains-tax-for-non-residents-uk-residential-property
https://www.gov.uk/tax-live-abroad-sell-uk-home
The Question I have how will the proceeds (income) from the sale of the UK Property will be treated /reported for the purposes of Tax filing within the USA.
If I have Zero Obligation for the UK Capital Gains Tax. How do I take the benefit of UK and USA Tax Treaties and Avoid paying Capital Gain Taxes in the USA. What forms do I need to use in the USA to report the Capital Gains and what gets reported please?
If that is not the option (Zero Tax Liability in USA for the Capital Gains), then what % will be due considering that I have owned this home for over 16 years, and where / how would it be reported within the US Taxes.
Thank you in advance for your help and providing a detailed professional response.
Iqbal AL-Luqman Mobile: +1(###) ###-####
Submitted: 9 months ago.
Category: UK Tax
Expert:  bigduckontax replied 9 months ago.

Hello Iqbal, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

You are an US citizen resident in the States. However, any income and capital gain you derive from UK property is liable to UK taxation. It is also subject to US taxation. Under the Double Taxation Treaty between the UK and the USA income and gains can only be taxed in one jurisdiction and in your case any tax payable to HMRC would be allowed as a tax credit against any US liability on the same cash flow.

As you have no liability under the UK taxation regime or the rentals you still have to declare the income and expenses thereof under the IRS System also as due to differences in taxation structure an US liability may be created. The same principle applies to Capital Gains Tax as does to your rental income.

As in both cases you have no UK liability you cannot take advantage of the Treaty. Had you income or taxable gain charged in the UK then you would, of course, have tax credits to offset US exposure.

I do hope that I have been able to resolve your problem.

Customer: replied 9 months ago.
Keith, I am not certain if I understand your responses clearly.If I have submitted tax forms to HMRC and it was deemed no tax liability then would that not excempt me from double reporting and end up paying full taxes according to the US Tax laws as to start with there was no tax due in the country where income was generated?Also could u please advise how, where and which tax forms to use for declaring it on the USA tax forms?Let's assume we had a small tax liability for the UK for both of these transactions, then would only the tax paid portion will be exempted or the whole income part please?Thank you,
Expert:  bigduckontax replied 9 months ago.

The fact that you had declared to HMRC would not, in any case, absolve you as an US citizen resident in the States from making a similar declaration to IRS as part of your income or capital gains.

As you had no tax to pay in the UK you do not benefit from the Double Taxation Treaty in force as there was no taxation to provide relief. If you did have an UK liability then, as I explained, any tax paid would be allowed as a tax credit on a similar USA liability.

Here is the IRS guidance on reporting foreign income:

'If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S. This is true whether or not you receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or the foreign equivalents. See Publication 525, Taxable and Nontaxable Income, for more information.'

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