Tax advice on US property rental (UK citizen soon to marry an American)

Hi there, I'm a British national / citizen and reside in the UK. My fiancé (soon to be wife) is American, she lives currently in America & we will be starting our life together in England in December once visa is submitted and approved.

So here is the dilemma...

I own a holiday home in the US (Arizona) and I want to rent it out now we have decided to  settle in / call the UK home. What taxes will I have to pay for the rental income received? I still have a mortgage on the US property which i have owned since 2010.

Do i have to pay taxes in both the UK and US? Any help would be greatly appreciated.

I know I need an accountants advise and this I plan on getting set up; I was just wondering whether it's best for my potential accountant to be UK or US based?

Or another option possibly would be to transfer the deed into my soon to be wife name as she is American and therefore may be more tax efficient?!

You may want to read some excellent UK government advice on how to choose a tax adviser; which can be seen here: http://www.ccab.org.uk/ChoosingAccountantTaxAdviser.php.

More broadly, for most UK based individuals there are often considerable advantages in having a UK based adviser who can jointly advise on both US and UK tax issues and handle both sets of tax returns in the UK.

These include:
1.   The client and the adviser being located in the same time zone.
2.   Client documents and workpapers being held outside of the United States; which many people perceive as providing additional protection in the event of IRS investigations.
3.   Advisers outside of the European Union are unable to offer the protections to clients provided by the Third European Money Laundering Directive, which requires all tax professionals throughout the EU to be regulated and supervised for anti-money laundering protection purposes.  Here in the UK it is a criminal offence to offer tax advice unless the adviser is supervised. Quite unlike within the EU, there is no requirement for mandatory regulation of tax advisers in most of the United States. 
5.   The fact that although there are roughly one million paid tax professionals within the United States, that there are naturally only very few amongst these who understand enough about the US reporting of foreign based taxpayers.
4.   The ability in the unlikely event that things ever go wrong to get issues addressed through a supervisory body that is closer to the client than an adviser located several thousand miles away.

The following comments may be of some assistance to bedfordshireboy

Article 6 of the UK US Double Tax Treaty confirm that the US may income from US real property of a UK resident. Therefore the US will tax the rental income from the holiday home according to US tax rules.

The UK will tax the income under the UK domestic tax rules applying to foreign rental income. There are two changes coming to these rules-
•   From 6 April 2017, restrictions on the deduction for mortgage interest. See here more details
https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords
The intention to abolish the current wear and tear allowance by a deduction for the cost of replacing furnishings. See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447461/150715_Wear_and_tear_condoc.pdf

The UK will give credit for the US tax against the UK tax, as required by Article 24(3) of the Double Tax Treaty.

Article 6 of the treaty gives the primary right of taxation to the country where the rental is located....so you are going to pay the US first and take a credit for any US tax on your UK self assessment. Don't forget your AZ tax liability......I'm not sure if you can take a UK tax credit for AZ tax paid.

You actually might not have to pay any US tax if your only US source income is the rent because with deductions it might fall below the tax threshold. Do a few quick estimates to see the level of your US source income. I'm assuming you will be taking the route of paying tax on the net income rather than treating it as business income.



But you obviously do also have to include the US rental income on your UK taxes so it will get taxed one way or the other.

Nun, thank you. Indeed, this is most certainly NOT a business. The rent will just about cover the mortgage and upkeep of the home (garden / yard maintenance and pool service etc). along with the odd thing (fingers crossed) that will need fixing etc.

As i complete a self assessment tax return each year, the UK declaration part Im comfortable with. The US part however i'm not!

Nun, thank you. Indeed, this is most certainly NOT a business. The rent will just about cover the mortgage and upkeep of the home (garden / yard maintenance and pool service etc). along with the odd thing (fingers crossed) that will need fixing etc.

As i complete a self assessment tax return each year, the UK declaration part Im comfortable with. The US part however i'm not!

You'll file a 1040NR with a Schedule E and the non-resident AZ tax form too, then claim a foreign tax credit (if any) on your UK self assessment.

Cheers. Do you think I'm best having my UK tax accountant handle all of this for me or do i need an accountant in the US too?

If you need an adviser, it is generally best to have a tax adviser or accountant located in the UK who is also qualified in the States, so can handle both sets of reporting.

If you need an adviser, it is generally best to have a tax adviser or accountant located in the UK who is also qualified in the States, so can handle both sets of reporting.

This is definitely true because the tax returns are interdependent. However, if all you have is US rental property your US and AZ returns should be quite simple and you should be able to do them yourself.

http://www.irs.gov/pub/irs-pdf/f1040nr.pdf
http://www.irs.gov/pub/irs-pdf/f1040se.pdf

https://www.azdor.gov/Portals/0/ADOR-forms/TY2014/10400/140NRBooklet.pdf

Your wife will have to file US taxes as well and if you are unfamiliar with the system she might be able to help you a bit.

Nun raised a point about whether any Arizona state tax can be claimed as a credit against any UK tax on the rental income.

HMRC has a list of US state taxes, and whether each can be claimed for double tax relief purposes. Under Arizona the only entry is “general income tax” and it is confirmed as being available for credit. This appears in HMRC manuals at DT19855.

Nun raised a point about whether any Arizona state tax can be claimed as a credit against any UK tax on the rental income.

HMRC has a list of US state taxes, and whether each can be claimed for double tax relief purposes. Under Arizona the only entry is “general income tax” and it is confirmed as being available for credit. This appears in HMRC manuals at DT19855.

So I think you'd be ok to claim a tax credit for any AZ personal income tax payable on rental income.