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Ask Merlo Your Own Question
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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We are retired having lived in London, England ...

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We are retired having lived in London, England for the past 33 years and have owned a house there for the past 30 years. Because of the downturn in the market there we have decided to rent the property until the housing market picks. In the mean time we are renting a room in Pacific Grove and are remodeling a house we bought 20 years ago and have used as a rental. My question is this, "How can we establish that our house in London England continues to be our primary residence?" The tax law there does not require me to pay any capital gains on my primary residence when we sell it, however when I bring those funds into the US am I liable for capital gains here even though my house sale was in the UK?" Is it true that when I move into my Pacific Grove house I will have to live in it for 2 years before it is considered my primary residence?

Hello Customer,

The current IRS regulations allow an exemption from any gain on the sale of your primary residence. In order to be considered your primary residence, you must have owned the home for at least 2 years and you must have lived in the home for at least 2 of the last 5 years. If you satisfy those two requirements, then you are eligible to deduct $250,000 (or $500,000 if married filing a joint return) from the gain on the sale of your primary residence.

Concerning the home that you now plan to convert to rental property, if during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can still exclude up to $250,000 of the gain ($500,000 on a joint return). However, you cannot exclude the portion of the gain equal to depreciation allowed when it was a rental property.

As far as the home you plan to move to in Pacific Grove, you would have to meet the same ownership and use tests as outlined above before it would be considered as your primary residence and qualify for any exclusion.

Thank you.

Merlo and 2 other Tax Specialists are ready to help you
Customer: replied 8 years ago.
Reply to Merlo's Post: Since my house sale in England is under UK tax law am I liable for tax here when I bring the funds into the country? Also because I ran the rental at a lose for the time I used as a rental I never depreciated it for tax purposes. What are the implications with that as I will eventually move into that house permanently.

Hello again Customer,

If you are a US citizen, you are subject to the same taxation laws of any other US citizen, regardless of what country you currently reside in. As a result, you are liable for tax on any gain from the sale of your UK home that is in excess of any exclusion amount you are entitled to.

If you owe any tax as a result of a gain on the sale of your home, the tax would be due in the year the sale was made, not just when you bring the money into this country.

As far as the depreciation on your rental property, if you were entitled to take depreciation on the property, then you cannot exclude the amount of depreciation that was allowed or allowable from the gain.

Thank you.