US tax bill on UK house sale for GC holders?

Hi - I'm a first-time poster and would be grateful for some advice! (even though we are neither 'Yankees' nor currently living iin the UK )

My husband and I are British citizens/Green Card holders resident in the US, where we own the house in which we have lived since moving to the US 5 years ago.

We also still own our house in the UK, in which we lived for 15 years before moving to the US. For the past 5 years it has been rented out.

We would now like to sell the UK house. In the UK, I believe, capital gains tax would be limited to the increase in value in the past 5 years. However, I have heard that this sale might potentially create a huge tax bill for us in the US.

Can anyone shed any light on this and/or tell me where I can find out more specific information? Is there a way of reducing any potential US tax liability? (NB: We are planning to stay in the US for another 10-12 years or so.)

Many thanks in advance!

What a great question.  It is one that is very common.

1. There is zero UK tax as neither of you are UK resident (don't forget this is different from domicile so since you are both still domiciled within the UK there would be both US and UK tax to pay on worldwide assets if either of you were to die; albeit that this can be reduced by planning such as spousal transfers, nil-rate band trusts, QDOTS etc.  I trust that your Wills alreadt account for this tax).

2. There is US Federal tax payable on the gain on sale at the long-term rate of 15%.

3. There may be State tax payable on the gain if the State where you live taxes captital gains.

4. You will also owe tax at a special 25% rate on depreciation claimable throughout the period it was let.

5. If you have suspended passive losses these can be used to reduce the tax bill.

6. You may have excess foreign tax credits (eg from the first year you moved to the US).  If so these can be used to reduce the tax.

Thank you very much for your comprehensive reply. However, this sounds ghastly!  Are you saying we would have to pay tax on the entire increase in value since we bought the house 20 years ago? What about money we spent refurbishing the house - can this be deducted? (It was almost derelict at the time and we spent a lot...)

What would happen if one or both of us were to move back to the UK before the house is sold? We had originally planned to stay in the US for another 10-12 years, but I certainly would be willing to return much sooner if it would help our tax situation.

I guess basically what I am asking is there any way of avoiding this tax...

Guya is 100% correct.  This is a bit of a shock for some folks.  You can deduct a huge list of items beginning with stamp duty and legal costs at the date of purchase, improvements throughout the life of the house, and costs of sale such as advertising and sprucing up.  For every item, you must multiply the ££ cost by the exchange rate on the day of each expense (which you can find at www.oanda.com).   

If you return to the UK before selling and live in it in the UK for 2 years, you can deduct $500,000 of the gain (though all of the depreciation addback would still be taxable at 25%).  It's $250,000 if only one of you live in it for the 2 years.

If you had received comprehensive tax advice before you acquired your greencard, your tax advisor would have warned you of this and advised that you consider selling the house before your greencards were activated.  You would have then paid zero tax in the US (and zero tax in the UK as it was presumably your primary residence at the time).

Alternatively, you can keep the house and never sell it, letting it out into perpetuity.

If you email me separately. I will send you a copy of an article that I wrote for a magazine which contains a comprehensive list for deductions for a house sale.

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