UK mortgage and the IRS - oops!

Hi All,

Must be tax time because I'm back on UK Yankee seeking help!

Although I consider(ed) myself pretty clued-up when it comes to my filings with the IRS, I had no idea about the phantom gains with a UK mortgage issue! So, I've got some questions.

Firstly, I've had a joint mortgage with my UK only, unmarried partner since 2013. We've been with Braclays the entire time. We've had two rate changes (2017 and 2024) in that time, but as far as I can tell, we've never had a new mortgage. Paperwork always says new mortgage rate with nothing about a new mortgage, account number is the same, and the principal is always the same. Probably only Braclays can confirm this, but it seems like I've never had a new mortgage, so don't think I would have triggered the need to report a phantom gain. Otherwise, due to Brexit, the 2017 rate change would have caused nearly a $50,000 phantom gain as the exchange rate went from approx 1.6 to 1.2 on a £133,000 mortgage. Am I being wishful here, thinking I don't have to sort out a phantom gain from 8 years ago?

Secondly, is there anyway around paying any additional phantom gains in the future. We still have about £25,000 left on the mortgage. My partner doesn't work at the moment, but now has the means to take the rest of the mortgage on herself. Although, if I was taken off the mortgage, I'm guessing the IRS would still expect me to pay for any phantom gains up to that point. There is obviously the issue that I would also probably have to be taken off the deeds, which puts me in an awkward position regarding housing if we ever split up. The upshot being that assuming we stay together, when we sell the house, I wouldn't have to worry about US CTG. This probably needs the advice of a professional, but I was wondering if anybody else had done something similar?

As always, any help, much appreciated.

I don't know the answer but am interested in seeing the replies.  I thought the mortgage issue was only a problem when selling a house in the UK and remitting the funds back to the USA.  I would have thought a mortgage that is taken out in the UK and paid off in due course without selling the house to pay it off should not attract any US taxes. I could easily be totally wrong.

How about other borrowing such as car loans?  If I borrow money to buy a car and pay off the loan, early or otherwise, I would not expect to be paying taxes to the IRS due to exchange rate movements.

Unfortunately, this is very much an issue. They're called phantom gains, and here is good summary of how bad it can be:

https://pjdtax.co.uk/updates/foreign-mortgage-gain/

The truly shocking part is that corporations can get around this because they are allowed to select the appropriate currency to do the deals in, but people, nope. Absolutely incredible that this is a thing, but it is.

Unfortunately, this is very much an issue. They're called phantom gains, and here is good summary of how bad it can be:

https://pjdtax.co.uk/updates/foreign-mortgage-gain/

The truly shocking part is that corporations can get around this because they are allowed to select the appropriate currency to do the deals in, but people, nope. Absolutely incredible that this is a thing, but it is.

Wow.  I’m so grateful not to have had a UK mortgage while being a US citizen.

How about other borrowing such as car loans?  If I borrow money to buy a car and pay off the loan, early or otherwise, I would not expect to be paying taxes to the IRS due to exchange rate movements.

In principle, yes, you could have a forex gain with a car or other similar loan. Practically speaking though it'd usually be a lot less than with a mortgage with the smaller principal and shorter loan term (with the latter meaning less of a chance of a large fluctuation).

(For most USC taxpayers living abroad the standard deduction - or itemized deduction if larger - provides a bit of a cushion for relatively small amounts of income that are neither excludable under the FEIE nor taxed by the other country with FTCs available. Larger amounts of such income, like the example here of forex gain from a mortgage versus a car loan, are likely to be above the deduction amount resulting in an IRS bill on this "phantom income".)

The truly shocking part is that corporations can get around this because they are allowed to select the appropriate currency to do the deals in, but people, nope. Absolutely incredible that this is a thing, but it is.

Because of that a workaround that has been suggested is to put the title/mortgage in some type of corporate structure (rather than the USC's name). That has a major disadvantage however - when you go to sell the house you wouldn't get any capital gains tax relief that is available to homeowners who have lived in the house and met the IRS requirements for the capital gains exclusion.

I won't contest that, if the tax regulations are taken literally, this is required. But there seems to be little evidence that the IRS expect this level of extreme compliance. I've not seen it mentioned in official guides for international taxpayers. A substantial number of US expats will have (or have had) a mortgage. I expect very few have complied with this or even been aware of it. Anxiety is being induced unnecessarily.

I won't contest that, if the tax regulations are taken literally, this is required. But there seems to be little evidence that the IRS expect this level of extreme compliance. I've not seen it mentioned in official guides for international taxpayers. A substantial number of US expats will have (or have had) a mortgage. I expect very few have complied with this or even been aware of it. Anxiety is being induced unnecessarily.

You could also make an argument that as long as you did not see a USD gain with the principal AND interest together that you paid* (as opposed to a gain on the principal amount only) that you should not have a forex gain. (I don't know of any precedent there - if someone knows a case where that's been tested feel free to cite it.) *With the caveat that you did not deduct the interest on a previous US tax return.

An example would be the case at the site sjb2016 gave a link to - although that mortgagee would've seen a $40,000 gain on the principal-only calculation, if they ended up paying at least that much in interest then my argument would be applicable.

(Note I am only discussing this from a theoretical perspective, not as advice on how one should proceed.)