Exchange rate gain

Hi all,

I am a US/UK dual national and have lived in the UK for 20+ years.  My husband (not a US citizen) and I remortgaged last year and I randomly stumbled upon information about paying tax on an exchange rate gain.  We bought in 2006 when then $ was weaker against the pound.....  So, I assume I need to make an adjustment to my 2018 return to reflect this tax that is due.  I am attempting to find a tax professional to help me with this, but in case anyone has experienced this before - :

1. How do I calculate the gain? Do I use the original mortgage amount or the capital balance at the time we remortgaged (repayment mortgage so this was less)?
2. Am I responsible for only half the gain because the property is jointly owned with my non-US husband?
3. Where do I report this on the tax return?  Some suggest line 21 on Schedule 1 but this line already contains my 2555 foreign income I am excluding.

I still have my full $12,000 personal allowance available and don't think the tax should be more than that.  But I want to make sure I am reporting this correctly.  No information of any description on the IRS website, of course!

Thanks!

You are suffering from a Section 988 - foreign currency gain. I'll forego commenting on my opinion of the absurdity of this as it applies to us long term residents abroad. The IRS offers little (read - none) advice/instructions as to how to calculate this gain.

From others:
https://www.andrewmitchel.com/charts/rr_90_79.pdf
https://blog.taxadvisorypartnership.com/blog/us-tax/foreign-mortgage-exchange-rate-gain

It is a gain, and as such (in my just 'normal taxpayer' opinion) would be reported as a normal gain on 1040. The IRS does have information on declaring gains:
https://www.irs.gov/taxtopics/tc409
(form 8949, schedule D, schedule 1, line 6 on 1040)

Unless the total gain is less than your $12,000 standard deduction, there will be a taxable amount. Remember, if you use form 2555 (FEIE) the gain will be taxed at a rate above the amount of your FEIE amount. You'll have to do the worksheets to calculate this.

Thank you for replying!  It's not a capital gain though, is it?  We've not sold the property...  Therefore I'm not sure that 8949 is the correct form to record a foreign exchange gain.

Fair enough, but 8949 is for 'capital assets'.

If I remember correctly, foreign currency gains are taxed at normal rates so schedule D would not be applicable.

Good luck with your search. Perhaps the professional members will respond.

EDIT: one blog suggests it is declared as interest?

Why is any tax due at all? You haven't sold the property yet - what is the gain?

Why is any tax due at all? You haven't sold the property yet - what is the gain?

The property has nothing to due with the 988 transaction. For the IRS, they are two separate taxable events.
https://hodgen.com/when-buying-a-home-is-a-forex-transaction/

"Section 988 is a tax regulation governing capital losses or gains on investments held in a foreign currency."
https://www.investopedia.com/terms/s/section-988.asp

There may have been a gain on the foreign currency debt due to exchange rate variations between acquisition and repayment.

EDIT: one blog suggests it is declared as interest?

Yes I suppose it could go there? TBH I may just put put it wherever I see fit and then add some sort of explanatory note. I’ve been quoted £1200+ vat for a return which is excessive, so I will do my best on my own!

It is decently certain that something is reportable, although there is substantial authority to treat this in more than one way on a US income tax return.  Thee are several dual US/UK qualified tax professionals in the UK.  Given the risk of getting this wrong, you may wish to engage a professional just for the one year so you know exactly what the position is that produces the optimum result in your circumstances.

£1,200 is not an untypical fee for a dual US/UK qualified tax professional given the costs of paying for staff salaries, office rent, business rates, insurance and professional education in the UK.

£1,200 is not an untypical fee for a dual US/UK qualified tax professional given the costs of paying for staff salaries, office rent, business rates, insurance and professional education in the UK.

Perhaps, but unfortunately it is more than I can reasonably afford at this point. Especially since there was no real financial gain resulting from the remortgage to release funds. Even if tax is due (which it’s probably not) it won’t be more than the £1500 odd advice would cost.